Higher fuel rates for company cars?

May 10th 2022

HMRC recently updated its advisory fuel rates for company cars. However, the new rates don’t even come close to reflecting the current pump prices. Can you pay employees a more realistic rate? Naomi Swan advises.

If you provide employees with company cars, you are entitled to pay them a fuel rate to reimburse them for business mileage. These are less generous than the approved rates applicable to employees that use their own vehicle, as the company car rates reflect the cost of fuel only, rather than wear and tear etc. HMRC updates its advisory fuel rates, the rate employers can pay without triggering any tax or NI consequences, on a quarterly basis.

It is possible to opt to pay above HMRC’s advisory fuel rates and not trigger any tax or NI consequences. This is permissible to take into account local fluctuations in pump prices and given how little the current published rates reflect the actual pump prices, it may now be worth looking at this.

In order to work out a bespoke rate, you will need the miles per gallon (MPG) figure for each car you will make payments for. It’s then a good idea to record the per litre price of all fuel purchases to work out an average cost, e.g. for the month. You then convert this into the per gallon price and divide this by the MPG figure to get the rate per mile. This is the same logic HMRC uses, you will just substitute the historic average price for a more accurate one.
For example, for a car averaging 40 MPG, filled with diesel at 180p per litre, the bespoke rate would be (180 x 4.546)/40 = 20p (25% higher than HMRC’s current rate).

We would advise you to keep these receipts and calculations in case HMRC asks you to justify the higher payments later on.

You can work out a bespoke fuel rate based on actual prices simply by dividing the “per gallon” price paid by the car’s miles per gallon figure. You should keep evidence of how this was worked out.