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HMRC internal manual

Employment Income Manual

Optional remuneration arrangements: particular issues – mileage allowance payments

Sections 203A, 228A and 229 ITEPA 2003

Employees are sometimes provided with mileage allowance payments under optional remuneration arrangements. The employer makes a payment that is less than the maximum tax-free mileage allowance payment that can be paid and then tops this up to 45 pence under optional remuneration arrangements.

The payment to the employee in respect of the amount paid under salary sacrifice represents a benefit which is covered by the optional remuneration arrangement rules.  The exemption for mileage allowance payments is a relevant exemption and so it does not apply to the extent that the payment is made under those arrangements. The taxable amount is the amount foregone by the employee.

Example

An employer pays 20 pence a mile to its employees when they use their own cars for business journeys. The employees then sacrifice salary of 25 pence and the employer tops up the mileage allowance payment to make a total payment of 45 pence per mile. The amount of 25 pence paid to the employee under salary sacrifice is taxable.

Under some arrangements, an employee is entitled to a cash allowance each month. That allowance is varied each month so part is automatically allocated to a mileage allowance payment to match the number of business miles driven by the employee during that period. Although the allocation is determined each month by the number of business miles driven, the employee is likely to have had to have entered into an agreement with the employer to vary the payment each month. So, the allocation to mileage payments falls within the optional remuneration arrangement rules.