One element of the Chancellor’s ‘Great British Summer Saving’ package was an increase in tax-free mileage rates. However, there remains a curious divide in the way in which HMRC deals with cars used by employees for business.
Company Cars vs. Personal Vehicles: The HMRC Divide
The Reality of Company Cars
These days, few employers that provide company cars also supply ‘free fuel’ (petrol or diesel) to their employees. The simple reason is that the income tax and national insurance (NI) levied on the benefit is excessive. In most instances, both the employer and employee are better off when:
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The employer reimburses the employee for the fuel used on business mileage.
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The employee pays for personal use fuel.
For example, if you are a 40% taxpayer with a company BMW 320i, the tax you would pay for ‘free fuel’ in 2026/27 is nearly £4,100. Even at current prices, you could buy over 2,600 litres of petrol for that amount of money.
Advisory Fuel Rates and the EV Quirk
HMRC publishes ‘advisory fuel rates’ for employers who compensate employees for fuel purchased for business travel in their company cars. The rates are updated quarterly and cover three different engine sizes for petrol, diesel, and liquefied petroleum gas (LPG) cars, as well as electric cars either charged at home or using a public charger. Provided your employer pays no more than the advisory rate, there is no personal tax or NI liability.
Current Quirk: You have no taxable benefit for private mileage if a company electric car is charged at the employer’s expense (e.g., at the office).
The Shift for Personally Owned Cars
The treatment for compensation for business mileage in an employee’s own car is much less sophisticated, starting with no distinction for engine size or fuel. Until Rachel Reeves revealed a rate change as part of her recent cost-of-living package, the maximum tax-free rates had been frozen since April 2011 at:
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First 10,000 business miles per tax year: 45p a mile
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Any additional business mileage in the tax year: 25p a mile
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Per passenger addition: 5p a mile
The New 2026 Rates
The Chancellor increased the main rate to 55p a mile, retrospective to 6 April 2026. While this 22.2% (10p) rise is welcome and long overdue, it still lags significantly behind the consumer price index inflation over the past 15 years, which sits at 52.5%. It is just another example of how governments of all hues rely on fiscal drag and inflation to boost the Treasury’s coffers.
Navigate Your Tax Efficiency with Chartwell Wealth Management
Understanding how shifting tax thresholds and mileage rates impact your overall financial position can be complex. Whether you are an employer looking to optimize your company vehicle policy or an employee navigating your personal tax allowances, small changes can have a significant impact on your wealth.
At Chartwell Wealth Management, we can help you look at the bigger picture and structure your finances efficiently. Contact the team at Chartwell Wealth Management today to discuss how we can support your financial planning goals.
Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.
