What it means
The alternative to a mileage allowance is a company car or reimbursing actual receipts, both of which create administration. Paying a single rate per mile is simpler because the employee submits a journey log and the business multiplies miles by a rate.
Most tax authorities publish an approved rate that can be paid free of income tax and payroll tax. Paying at or below that rate keeps the reimbursement outside taxable pay, while anything above it is usually treated as extra earnings and taxed accordingly.
The rate is deliberately broader than fuel alone. Fuel might be a third of the true cost per mile, with the balance covering depreciation, tyres, servicing, insurance and road tax, which is why paying a fuel-only rate leaves employees genuinely out of pocket.
In the accounts, mileage reimbursement is an operating expense, typically sitting under travel costs, and it is deductible for the business in the same way as any other business travel. The critical control is the journey log, because a claim without a date, purpose, start point and destination will not survive an audit.
A common variant is the two-tier rate, where a higher rate applies to the first block of business miles in a year and a lower rate afterwards, on the logic that fixed costs such as insurance and depreciation are already covered once mileage is high. Some businesses also pay a lower additional rate for carrying a colleague on the same trip.
In practice
Real-world examples.
Example
A regional service engineer logs 1,150 business miles in a month and claims at $0.67 per mile, producing a reimbursement of $770.50 paid alongside salary but recorded as an expense rather than taxable pay.
Example
A charity pays volunteers a lower mileage rate than staff and reimburses only journeys between client visits, not the trip from home to the office, which keeps the payments within the tax-free category.
Example
A consultancy switches from company cars to a mileage allowance for its three lowest-mileage consultants. It removes about $9,000 a year of lease and insurance cost per vehicle and replaces it with roughly $4,000 of mileage claims each.
Formula
Calculation
The calculation is simple: Reimbursement = Business miles driven x rate per mile.
A field sales representative drives 14,500 business miles in a year and her employer pays a rate of $0.67 per mile.
Reimbursement = 14,500 x $0.67 = $9,715 for the year.
Now compare that with what she actually spends. If her car averages 29 miles per gallon and fuel costs $3.48 per gallon, her fuel bill for those miles is 14,500 / 29 = 500 gallons, at a cost of 500 x $3.48 = $1,740. The remaining $7,975 of the allowance covers her share of depreciation, servicing, tyres and insurance, which is exactly what the rate is designed to do.Case study
Seen in the real world.
Thornbury Facilities Services is an invented company used purely as an illustrative example. It employed 22 mobile engineers and paid a flat $0.30 per mile, on the reasoning that this comfortably covered fuel at prevailing prices.
Two problems appeared. Engineers began declining jobs on the far side of the region because those trips cost them money once servicing and tyres were counted, and staff turnover in the mobile team ran at nearly double the rate of the office team, with exit interviews repeatedly mentioning vehicle costs.
The fictional company moved to $0.67 per mile for the first 10,000 miles each year and $0.30 per mile after that, and it made the journey log mandatory in the scheduling app so no separate paperwork was needed. With each engineer averaging 12,000 business miles, annual mileage cost rose from 264,000 x $0.30 = $79,200 to $160,600, but job refusals stopped, and the finance director judged that the extra $81,400 was cheaper than recruiting and training five engineers a year.
Watch out
Common mistakes.
- Setting the rate to cover fuel only. Fuel is roughly a third of the true cost of running a car per mile, so a fuel-only rate quietly transfers depreciation and servicing costs onto the employee.
- Reimbursing commuting miles. Travel between home and a regular workplace is normally private travel, and paying for it usually creates a taxable benefit rather than a clean expense.
- Accepting round-number claims without a journey log. A claim for exactly 1,000 miles with no dates, destinations or business purpose is the first thing an auditor will challenge.
Questions
People also ask.
Can a business pay more than the approved rate?
Yes, but the excess is generally treated as taxable pay for the employee and subject to payroll deductions.
Does the allowance cover parking and tolls?
Usually not, because those are separate out-of-pocket costs that are reimbursed on receipt in addition to the per mile rate.
Should a business use a mileage allowance or a company car?
Mileage allowances suit lower annual mileage and mixed private use, while company cars tend to be cheaper once an employee is driving very high business miles and the vehicle is used almost entirely for work.
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