The 45p Mileage Rate: What It Actually Covers
If you employ someone who uses their own car for work, you can pay them up to 45p per mile without triggering a tax charge or a National Insurance (NI) bill. That's the Approved Mileage Allowance Payment (AMAP) rate set by HMRC. It applies to the first 10,000 business miles in a tax year.
Above 10,000 miles, the rate drops to 25p per mile. This is the same for all cars, vans and motorcycles. The rates are reviewed annually by HMRC and have been fixed at 45p since 2011. They are not going up for 2025/26.
The 45p rate is designed to cover all costs of running the car: fuel, insurance, tyres, servicing, depreciation and road tax. It is not a fuel-only rate. That is a common misunderstanding. You are not just reimbursing the petrol cost. You are covering the full cost of the employee using their own vehicle for your business.
What Counts as a Business Mile
Before you start paying mileage, you need to be clear on what qualifies. HMRC defines a business journey as travel that is "wholly and exclusively" for the purposes of the trade. That means:
- Travel between your business premises and a client site
- Travel between two client sites
- Travel to a supplier, a trade show, or a training venue
- Travel between your office and a temporary workplace (not your employee's normal permanent workplace)
Ordinary commuting does not count. If your employee drives from their home to your permanent office, that is commuting. It is not a business journey. The only exception is if their home is also their permanent workplace, which is rare and requires specific conditions to be met.
So if you run a plumbing business in Birmingham and your employee drives from their house in Digbeth to a customer site in the Jewellery Quarter, the mileage from home to the customer is business mileage. The trip from home to your yard where they pick up the van is not business mileage if the yard is their normal starting point.
You need a proper mileage record. The employee should log the date, start and end points, purpose of the journey, and miles driven. A spreadsheet works. A dedicated app like MileIQ or the mileage tracking in Xero or FreeAgent is better. HMRC can ask to see these records if they ever review your payroll.
How to Pay Mileage Through Payroll
You have two options. You can pay the mileage as a tax-free reimbursement, or you can let the employee claim the tax relief themselves. Most employers choose to pay the reimbursement because it is simpler for the employee and it is a straightforward expense for the business.
If you pay exactly 45p per mile for the first 10,000 miles and 25p per mile thereafter, the payment is tax-free and NI-free. You do not report it on a P11D. You do not add it to their payroll software as pay. You just process it as a business expense reimbursement through your payroll or your accounting software.
In FreeAgent or Xero, you would typically create an expense claim for the employee, attach the mileage log, and mark the payment as a mileage reimbursement. The software handles the tax treatment automatically if you use the mileage rates correctly.
If you pay a higher rate than 45p, the excess is taxable. You must report it through payroll and deduct PAYE and NI on the difference. For example, if you pay 50p per mile, the extra 5p per mile is treated as earnings. You need to add it to the employee's gross pay on the next payroll run.
If you pay less than 45p, the employee can claim tax relief on the difference. They do this through their self assessment tax return. You do not need to do anything as the employer, but you should provide them with a statement of the mileage you reimbursed so they can calculate their claim.
What About Electric Cars?
HMRC introduced a separate rate for electric cars in 2018. The Approved Mileage Allowance Payment for electric vehicles is the same 45p per mile for the first 10,000 miles, then 25p per mile. There is no separate higher rate for electric cars.
This is a problem in practice. Electric cars are cheaper to run per mile than petrol or diesel cars. The 45p rate is based on average running costs across all fuel types. If your employee drives an electric car, they are likely making a small profit on the mileage payment. That is fine. It is still tax-free. HMRC does not require you to adjust the rate down.
Some employers choose to pay a lower rate for electric cars, say 20p or 25p per mile, to reflect the lower fuel cost. That is permissible, but you must have a clear policy and apply it consistently. If you pay less than 45p, the employee can still claim tax relief on the difference up to the 45p limit.
If the employee charges their car at home and uses it for business, the 45p rate covers the electricity cost. They do not need to keep separate electricity bills or calculate the pence per mile of their home charging. The flat rate covers it.
What About Company Cars?
The 45p rate does not apply to company cars. If you provide an employee with a company car, you do not pay mileage at the AMAP rate. Instead, you pay for the fuel they use for business journeys. You can reimburse them at HMRC's Advisory Fuel Rates (AFR), which are published quarterly and vary by engine size and fuel type.
Company car drivers pay tax on the car as a benefit in kind. They do not also pay tax on the fuel you reimburse them for business mileage, as long as you use the advisory rates. If you pay more than the advisory rate, the excess is a taxable benefit.
For most small businesses, company cars are less common than employees using their own vehicles. If you are considering providing a company car, speak to an accountant first. The benefit-in-kind tax can be significant, especially for higher-rate taxpayers.
What About Motorcycles and Bicycles?
The AMAP rates for motorcycles are 24p per mile regardless of distance. For bicycles, the rate is 20p per mile. These are flat rates. There is no 10,000-mile threshold. The same rules apply: pay the rate and it is tax-free. Pay more and the excess is taxable.
If you have an employee who cycles to client meetings in central London, 20p per mile is the tax-free limit. You can pay it through payroll the same way you would for car mileage.
What Happens If You Get It Wrong?
If you pay mileage above the approved rate without reporting it correctly, you create a payroll error. HMRC can assess you for unpaid PAYE and NI, plus interest and penalties. The employee also faces a potential tax charge if they did not declare the excess on their personal return.
If you fail to keep mileage records and HMRC challenges your mileage payments, you may struggle to prove that the journeys were business-related. Without records, HMRC can treat the entire mileage payment as earnings and assess tax and NI on the full amount.
If you pay less than the approved rate and the employee claims tax relief, HMRC will process the claim. That is straightforward. But if the employee does not realise they can claim, they lose out on tax relief they are entitled to. As an employer, you are not required to tell them, but it is good practice to provide them with a mileage summary at the end of the tax year.
Practical Steps for Employers
Here is what you should do if you are paying employee mileage at 45p per mile:
- Have a written mileage policy. State the rate you pay, what qualifies as a business journey, and how employees should record their mileage.
- Require employees to submit a mileage log with each expense claim. Do not accept verbal claims or rough estimates.
- Use payroll or accounting software that handles mileage reimbursements correctly. Most cloud accounting packages do this automatically.
- Track cumulative mileage per employee across the tax year. Once they hit 10,000 business miles, drop to 25p per mile for the rest of the year.
- If you have multiple employees, track each one separately. The 10,000-mile limit is per employee, not per business.
- Review the rates each April. HMRC sometimes changes them. They have not changed since 2011, but that could change in future.
If you are unsure about any of this, speak to us. We are ICAEW qualified accountants and we deal with mileage queries regularly. One conversation can save you a lot of payroll corrections later.
Mileage and the Director's Own Car
If you are a director of your own limited company and you use your personal car for business, the same rules apply. You are an employee of your company. You can pay yourself 45p per mile tax-free for the first 10,000 business miles, then 25p per mile. You need to keep a mileage log just like any other employee.
This is a common way for directors of small companies to extract money from the business tax-efficiently. It is not a salary. It is not a dividend. It is a reimbursement of expenses. It does not attract PAYE, NI or corporation tax. The company claims the mileage as an allowable expense against its corporation tax.
But you must be able to demonstrate that the journeys were genuinely business-related. If HMRC reviews your company and sees that you claimed 10,000 miles but have no client meetings or site visits to show for it, they will challenge it. Keep the records.
For more on director expenses and tax planning, see our guide to director pay and dividends.