Business mileage rate / tax on redundancy payments

In today’s post we’ve provided you with an update on two topics. First is on the rules for paying employees more than the maximum business mileage rate. Second is a reminder of the tax threshold for redundancy payments.

Business mileage rate rules

With the high cost of fuel, many businesses may wonder whether it’s possible to reimburse employees more than the maximum 45p per mile allowed by HMRC.

In various correspondence and in answers to parliamentary questions, the government originally suggested that actual expenditure in relation to business mileage could be reimbursed free of Income Tax and National Insurance contributions.

However, Alan Mak, Exchequer secretary to the Treasury then confirmed this is not the case. If you reimburse travel costs at the maximum approved mileage allowance payment (AMAP) of 45p, this is tax free. However, if you reimburse employees more than this, the extra payments become liable for Income Tax and National Insurance.

If you have been reimbursing employees at a higher rate without deducting tax and NI, please speak to your account manager. We’d be delighted to make the relevant corrections to your accounts.

Tax on redundancy payments

Given the ongoing cost of living crisis and how close we are to entering a recession, it’s possible that more people will find themselves facing redundancy.

Yet, surprisingly, the tax threshold for receiving redundancy pay tax free is still only £30,000. This rate hasn’t changed since 1988. If it had increased in line with inflation, it would now be somewhere in the region of £73,000.

Because of this, more and more people will face taxation on their redundancy pay. According to the Daily Telegraph, the government raised almost £380 million from redundancy pay in 2017-18. The average bill was £7,541 per person.

Why hasn’t the redundancy tax threshold changed?

It does seem strange that the redundancy tax threshold has remained static for 35 years. However, government did hold a consultation on the matter back in 2015. This garnered a wide range of responses. While some thought the threshold should rise in line with inflation, others suggested reducing it. One idea was to reduce it to the level of the average termination payment of about £14,000. Another was to cut it to reflect the average salary level (£27,000).

That said, most respondents said they felt the £30,000 threshold should remain. Consequently, it remained unchanged.

Unfortunately, if a recession really is around the corner, the unchanged threshold is going to be very bad news for many people who are made redundant. The Daily Telegraph quotes an expert who pointed out that higher-rate taxpayers would pay up to £17,200 more in income tax than they would have done if the threshold had risen with inflation.

While most businesses try not to make redundancies whenever possible, they are sometimes unavoidable. If you feel you need to make redundancies, remember that we’re here to help. Arrange a chat with your account manager and we’ll help to talk you through your options.