The Chancellor’s Great British Summer Saving package included a rise in tax-free mileage rates.
There is a curious divide in the way in which HMRC deals with cars used by employees for business:
Company cars: These days, few employers that provide company cars also supply ‘free fuel’ (petrol or diesel) to their employees. The simple reason is that the income tax and national insurance (NI) levied on the benefit is excessive. In most instances, both the employer and employee are better off when:
- the employer reimburses the employee for the fuel used on business mileage; and
- the employee pays for personal use fuel.
For example, if you are a 40% taxpayer with a company BMW 320i, the tax you would pay for ‘free fuel’ in 2026/27 is nearly £4,100. Even at current prices, you could buy over 2,600 litres of petrol for that amount of money.
HMRC publishes ‘advisory fuel rates’ for employers who compensate employees for fuel purchased for business travel in their company cars. The rates are updated quarterly and cover three different engine sizes for petrol, diesel and liquefied petroleum gas (LPG) cars, as well as electric cars either charged at home or using a public charger. Provided your employer pays no more than the advisory rate, there is no personal tax or NI liability.
One current quirk is that you have no taxable benefit for private mileage if a company electric car is charged at the employer’s expense (e.g., at the office).
Personally owned cars: The treatment for compensation for business mileage in an employee’s own car is much less sophisticated, starting with no distinction for engine size or fuel. Until Rachel Reeves revealed a rate change as part of her recent cost-of-living package, since April 2011 the maximum tax-free rates had been:
- First 10,000 business miles per tax year: 45p a mile
- Any additional business mileage in the tax year: 25p a mile
- Per passenger addition: 5p a mile
The Chancellor increased the main rate to 55p a mile, retrospective to 6 April 2026. The 22.2% (10p) rise compares with consumer price index-inflation over the past 15 years of 52.5%.
While the rate increase is welcome and long overdue, it is just another example of how governments of all hues rely on inflation to boost the Treasury’s coffers.
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Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
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