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Fuel rates calculation

We are reviewing our mileage/fuel rates from 1 June. Our calculation for the company car mileage rate is simple as we base this on the average supermarket cost (data from AA.com). It can differ approximately 1p above or below the HMRC rate and we apply NIC calculations where it is above. How do we calculate an amount for employees that use their own car for business purposes? This rate would include fuel and wear and tear.

HMRC sets ‘authorised mileage rates’ for this – 40p for the first 10,000 miles, and 25p for subsequent miles. However, for us historically we have added a nominal amount of between 9p to 12p (depending on engine size) to the company car fuel rate, but I cannot find a calculation for that additional amount.

HMRC-authorised mileage rates have been with us for many years and are not adjusted every six months as they do with ‘advisory rates’. Am I to assume there is automatically some level of benefit in those authorised rates? In which case, as an employer I would prefer to remove that element and pay only what needs to be paid.

How do I calculate a fair rate of mileage for those employees who use their own vehicles? We currently pay a maximum of 31p per mile for private cars (for 2000cc+) – less than HMRC’s 40p – and I don’t know how reasonable that is. How does HMRC calculate its 40p/25p rates?

Paula Lord, financial controller

Norman Green (columnist, p10) replies: The advisory fuel rates for company cars have a dual function. The first is to reimburse the employee for the cost of fuel when undertaking business mileage in a company car. The other use is for those employees with the benefit of fuel provided by their employer for their company car, who can use the rates to reimburse their employers for the cost of fuel used for private mileage and thus avoid the fuel benefit charge.

Because of the dual purposes, the rates have to be carefully determined to balance cost against potential benefit. For that reason, the rates are different for different engine size and fuel type. Employers are free to use other rates where there are exceptional circumstances such as most business mileage being travelled over rough terrain and in four-wheel-drive mode. Using different rates to those published for no specific reason, and without the agreement of HMRC, creates benefit-in-kind charges for tax and NICs.

The authorised mileage rates have a wider application and the 10,000 miles limit was set to include most employees using their own cars as it is generally the case that employees travelling more than 10,000 business miles in a year have a company car. Since it is a rate for using a private vehicle, it includes all motoring costs rather than just fuel. It is for this reason that the rate drops after 10,000 miles for tax (peculiarities in the NIC system prevent this happening for NICs).

The single rate (in practice) was introduced for administrative ease. It will create some level of profit for those with economic cars and some level of loss for those with, for example, large-engine cars. The administrative costs are likely to exceed any tax were it recovered on the profit. HMRC does not publish details of how it arrives at the authorised mileage rates, but the rates are reviewed regularly.

As the correspondent is using the AA for some rates, it would seem reasonable to use the AA inclusive motoring costs rates for employees using their own cars for business mileage. As long as the rates do not exceed the HMRC rates, no reporting is required and the employees are able to claim tax relief on the difference between the rates paid and the HMRC rates.

Pension poverty

Two-thirds of UK adults plan to work beyond state retirement age (SRA), according to a report produced by Wriglesworth Research for Aviva. Over half (60%) say they will stay on in a bid to boost their finances, while 10% don’t think they’ll ever retire fully.

Working beyond SRA to generate a bit more cash for your pension is one thing, but waiting until later in life to save the bulk of the money needed for retirement is a risky strategy, says Clive Bolton, the At-retirement director of UK Life Aviva. He says, ‘Salaries can – and do – fall immediately prior to retirement, so a long-term approach to pension planning is crucial.’

Most people underestimate the amount they should be putting away, or start saving far too late in life. Often they don’t realise there’s a chasm between their target income and projected income until a year or two before their retirement date. At this point it can be impossible to make up the shortfall without working many years later than expected. The responsibility to educate employees on pensions saving must be taken on by employers. Employees need guidance on how they can build a decent pension pot, especially those that are members of defined contribution schemes. Securing a comfortable retirement with a defined contribution scheme means getting three key things right:
saving from an early age; contributing enough per month; and getting the balance of investments right.

Financial awareness has improved in recent years. Most people realise they can’t rely on the state to provide them with a comfortable retirement; qualifying for the full basic state pension provides a single person with just £97.65 a week. As a nation we are abysmal savers: one in four households can’t access more than £100 without increasing their borrowing, according to Aviva. And the average annuity is bought with a pension pot of just £24,330, says the Pensions Policy Institute. If used to buy a single-life annuity for a 65-year-old man, this would provide an approximate income of just £120 a month.

Without suitable financial and pensions education, many employees will have no choice but to work well into their 70s – even 80s – in order to avoid poverty as a pensioner.
Lauren Peters, head of financial education at MoneyinMind.com

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