Paying mileage allowance to contractors

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Did you know that if you trade through a limited company, then you can pay yourself or your employees a mileage allowance for business journeys made in their own vehicle car using HMRC’s approved rates. If you use these rates then any mileage allowance payments made will be tax and NIC free for the employee and your company can claim a tax deduction.

However, what’s the tax position if you pay a mileage allowance to any contractors working with you?

Your company can pay freelancers whatever mileage allowance you decide is appropriate and can claim a tax deduction against its profits for this mileage allowance (obviously providing this expense is for genuine business reasons!).

Whilst there doesn’t seem to be any obvious benefit in paying a mileage allowance to contractors, many contractors aren’t aware they can claim a tax deduction for any mileage allowance incurred.

So how can you use this to your advantage?

You could suggest to your contractors that you pay them an allowance for travel that you guarantee is tax-free. This will replace an equivalent amount of money they charge you for work and can give them a tax advantage

An example:

Luke is a kitchen fitter and you put a significant amount of work his way. On average he drives about 16,000 miles for you each year. He’s just bought a 2 year old van for £5,500 and uses it for private journeys 25% of the time.

He reckons he’ll keep the van for 4 years then sell it. His running costs are £2,700 a year and his fuel costs for business trips amount to £1,800.

His tax position is as follows:

  • If he claims a business proportion of these costs (75%) he’ll get tax relief on £3,375 (£2,700 plus £1,800 x 75%)
  • If he claims HMRC’s mileage rates he’ll get tax relief on £6,000 (10,000 miles at 45p and 6,000 miles at 25p)
  • Over 4 years that’s additional tax relief of £10,500 (£6,000 less £3,375 x 4 years). This will potentially save Luke tax and Class 4 NIC of over £3,000

Although it’s the contractor’s responsibility to keep a proper mileage log we’d also recommend you do this too. That way you’ll be able to calculate the mileage allowance you need to pay them as you’ll know where you’ve sent your contractor to each job you engaged them for.

Thank you to Friendly Accountant Richard Baldwyn for sending in this article.

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