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Mileage Expenses and Rocketing Fuel Prices

Newsletter issue - July 08.

Fuel prices are rocketing, so employees are increasingly reluctant to use their own cars for business journeys. As an employer you can pay a tax free mileage rate to your employees of 40p per mile for the first 10,000 business miles driven in one tax year, and 25p per mile for extra miles in the same year. These rates haven't been changed for over 6 years. To keep your employees happy you could pay a higher mileage rate, but you need to report the excess amount paid on the form P11D and the employee will be taxed on that extra payment.

Where an employee uses a company car, but pays for all the fuel, the company can pay a fuel-only mileage rate for business journeys. This fuel-only rate is guaranteed to be tax free when it is equal to or less than the advisory fuel rates set by the Taxman every six months. This advisory fuel rate has just been increased with effect from 1 July 2008, although due to the escalating fuel prices the Taxman has said the higher rates can be used for journeys made in June.

The new advisory fuel rates, with the old rates in brackets, are:

Engine size




1400cc or less

12p (11p)

13p (11p)

7p (7p)

1401cc to 2000cc

15p (13p)

13p (11p)

9p (8p)

Over 2000cc

21p (19p)

17p (14p)

13p (11p)

These rates are based on average fuel prices per litre of 114.8p (petrol), 127.2 (diesel) and 57.1p (LPG). If the prices in your local area are much higher, or your company cars are less fuel efficient than average, you can pay a higher mileage rate. You need to keep a record of how you calculated the higher mileage rate.