The Chancellor has announced that the tax-free mileage allowance for employees using their own car or van for work will increase by 10p per mile, from 45p to 55p for the first 10,000 business miles, backdated to April 2026.
For employees who spend a lot of time on the road, this could be a meaningful boost. For business owners, it is also a prompt to review mileage policies, payroll processes, expense claims and cashflow.
What is changing?
The approved mileage allowance is the amount an employer can pay an employee for using their own vehicle for qualifying business journeys without creating a tax or National Insurance charge.
The announced change means that, for cars and vans, the tax-free rate for the first 10,000 qualifying business miles is to rise to 55p per mile. The rate for business miles above 10,000 is expected to remain at 25p per mile.
This does not mean every business must pay 55p per mile. It means the business can pay up to that approved amount tax and NI free, provided the journeys qualify and the records are accurate.
If an employer pays less than the approved rate, the employee may be able to claim tax relief on the difference. That is an important distinction: they claim tax relief, not the full shortfall back from HMRC.
What employers need to do
Business owners should not just change the rate and move on. There are a few practical steps to get right:
- Review your mileage policy and decide whether to pay the full 55p, keep your current rate, or apply a staged increase
- Update payroll, bookkeeping and expenses software once HMRC's formal guidance is confirmed
- Check whether any claims from April 2026 need to be topped up or adjusted
- Make sure employees record the date, destination, business purpose and mileage for each journey
- Make clear that ordinary commuting does not qualify
- Budget for the extra cost if you have employees who drive regularly
- Consider whether your pricing needs to reflect higher staff travel costs, particularly in care, trades, field sales and service-based businesses
Pitfalls to watch
The main risk is paying mileage without checking whether the journey actually qualifies. Travel from home to an employee's normal place of work is usually ordinary commuting and is not covered by the approved mileage rules.
Employers also need to be careful with company cars. The approved mileage allowance applies where an employee uses their own car or van. If the employee has a company car, different rules apply, including advisory fuel rates and possible benefit-in-kind issues.
VAT is another common area of confusion. A VAT-registered business cannot simply reclaim VAT on the full mileage payment. Any VAT claim is linked to the fuel element only and must be supported by proper VAT receipts.
What about sole traders?
A sole trader does not reimburse themselves in the same way an employer reimburses an employee. Instead, they claim allowable motor expenses through their business accounts or Self Assessment tax return.
Sole traders can usually choose between claiming a business proportion of actual vehicle costs or using HMRC's simplified mileage method. Once the flat-rate method is chosen for a particular vehicle, it generally needs to continue for that vehicle.
If HMRC updates the simplified mileage rates to reflect the announced change, sole traders should check whether using mileage continues to be the best option compared with claiming actual costs. The right answer depends on mileage, vehicle costs, finance arrangements and business use percentage.
The key point
This is a helpful change, particularly for employees who cover a lot of miles for work. But for business owners, the important point is control.
Decide what your policy will be, cost it properly, keep the records clean and make sure employees understand the rules.
As ever, if you need any assistance to ensure that your policy meets the criteria, please do not hesitate to contact us.