If you are running your own business or operating as a sole trader, you may well be entitled to tax relief from the Inland Revenue on the costs you are paying out. In order to receive what is known as ‘mileage allowance relief’ you need to keep a strict record of all the business travelling you do. Journeys that qualify as business travel are those you have to make in the course of your job, such as visiting a client, but they do not include trips you make from home to work. By making a log of these you can work out exactly how much relief you’re entitled to. The best way is to use an example.
- Mrs. Brown runs a home hairdressing service and over the course of the tax year she travels 12,000 business miles
- The Inland Revenue’s approved business mileage rate for the first 10,000 miles is 40 pence per mile, for each mile over this limit the figure drops to 25 pence
- 10,000 x 40 pence = £4,000
- 2,000 x 25 pence = £500
Which means Mrs. Brown can claim tax relief from the Inland Revenue on a figure of £4,500. She can do this by sending her calculations to the Inland Revenue or asking for form P87. They will then work out what they owe her and send a rebate at the end of the tax year. But what if Mrs. Brown employs her friend Miss Green to work for her? Miss Green travels 5,000 business miles cutting hair, and Mrs. Brown agrees to pay her 50 pence per mile. As Mrs. Brown is paying her employee above the IR’s mileage rate it becomes a taxable benefit
- So 5,000 x 40 pence (IR rate) = £2,000
- 5,000 x 50 pence (What Miss Green is actually paid) = £2,500
The difference between the two is £500, meaning Miss Green would be liable to pay tax and NIC contributions on this amount. As the employer Mrs. Brown has to report the details of the mileage and the amount paid to Miss Green to the Inland Revenue.
Remember: To make a claim for tax relief you need clear and accurate records of your business mileage