HMRC has confirmed new VAT rates for drivers that will come into effect from May 21, following an update from Chancellor Rachel Reeves. The Labour Party Chancellor delivered her cost of living package and support for households amid the ongoing Iran war and Russia invasion of Ukraine on May 21.
Mileage Allowance Increase
In the House of Commons on Thursday, Ms Reeves increased the tax-free mileage allowance for drivers by 10p per mile in a historic move aimed at supporting workers across the UK. The change comes after approved mileage allowance payment rates remained unchanged since 2011.
Under the current HMRC system, workers can claim 45p per mile for the first 10,000 business miles traveled each year and 25p per mile after that threshold. Employers are not required to report to HMRC or pay tax on these payments, but employees can receive tax relief, known as Mileage Allowance Relief (MAR), on the unused balance of the approved amount. Employers can also make separate optional reports to HMRC of any such unused balances under the Mileage Allowance Relief Optional Reporting Scheme (MARORS).
What Are Mileage Allowance Payments?
Mileage Allowance Payments (MAPs) are what an employer can pay employees for using their own vehicle for business journeys. They are allowed to pay employees a certain amount of MAPs each year without reporting them to HMRC. This is called an 'approved amount'.
Ms Reeves stated: "I can today announce a 10p per mile increase in tax-free mileage rates backdated to April 2026, benefiting those who drive to work. This comes on top of support we've already put in place, including freezing fuel duty, taking £117 off energy bills, freezing prescriptions, fuel duty and rail fares."
She added: "We are able to do this because we have made the right choices, resulting in the UK having the fastest-growing economy in the G7, with inflation going down. I know the cost of living is still a number one concern for households. Our economic plan is the right one, supporting families and businesses and building a stronger and more secure Britain."
