You want to use cyclists to deliver to your local customers. You’ve been told you can pay them a tax and NI-free mileage allowance which could save you money. However, HMRC’s helpline doesn’t mention this. What’s the correct position?
Employed or self-employed?
To answer the question we need more information, i.e. whether the individuals will be employed by you or self-employed. The likelihood is, because of the nature of the work and in line with court rulings for similar so-called gig economy jobs, the cyclists will be “workers” for employment law purposes. This gives them more rights than the self-employed but fewer than employees, but for tax purposes a worker is classed as self-employed. Of course, we can’t assume their employment status so we explain the tax position for mileage allowance payments for employees and the self-employed.
Employer pays approved mileage rate
If an employee uses a bicycle not owned by their employer for business journeys, the employer can pay them a mileage allowance of up to 20p per mile tax and NI free. Keep in mind that journeys between an employee’s home and their permanent workplace are not qualifying business journeys. However, a delivery person of the sort envisaged by our subscriber (think Deliveroo) has no permanent workplace and so every mile from home to our subscriber’s premises and her customers’ locations is a business mile.
Employer pays less than approved rate
If an employer pays less than the maximum mileage allowance rate the employee is entitled to a tax deduction for the difference.
Example. Kevin works in the evenings delivering takeaway food for a local restaurant. His contract states he is an employee. He uses a privately owned bike for journeys between his home, the restaurant and its customers. In a typical week the restaurant pays Kevin a mileage allowance on top of his wage of 10p per mile. Kevin cycles 100 miles delivering food in a typical week. This means:
- the restaurant owner can claim a tax deduction for the £10 for the mileage allowance
- the £10 Kevin receives is not taxable income nor is it liable to NI; and
- Kevin can claim a tax deduction of £10 per week (20p approved mileage rate less the 10p per mile received from employer x 100 miles).
Trap. If an employer pays more than 20p per mile they must deduct PAYE tax and NI, and account for employers’ NI on the excess.
Self-employed workers
Your plan was to pay a small fixed amount for each delivery and a mileage allowance depending on the distance of return journey between your premises and the customer’s location. The tax and NI-free status would make the mileage allowance worth more pound-for-pound than a fixed payment. So, she could pay the delivery riders less but they wouldn’t be worse off because they have to pay tax on the mileage element.
Trap. The bad news is that the tax and NI-free allowance of 20p per mile only applies to payments to employees. This means the delivery riders would be taxed on the mileage allowance after deducting any expenses incurred for the purchase and upkeep of their bikes.
Tip. By contrast, if the deliveries were made by car, van or motorbike you could pay the self-employed drivers a mileage allowance which would be tax and NI free for the recipients.
The tax and NI-free mileage allowance can be paid to employees but not to self-employed workers. The allowance counts as their business income but they can claim tax deductions for the cost of buying and maintaining their bikes. However, mileage allowances paid to self-employed motorbike, car and van drivers can be tax and NI free.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.