Mileage Reimbursement: What the Rate Per Mile Really Covers

People look at a mileage rate, work out what they spend on fuel, and conclude they are being overpaid. That reading misses most of what the rate is for, and it usually costs the driver money because they stop claiming properly.

What the flat rate is actually paying for

A standard mileage rate is an estimate of the total cost of running a car for one mile. Fuel is in there, but so is the depreciation caused by adding miles to the odometer, plus insurance, road tax, tyres, servicing and the repairs that come with higher use. On the worked example below, fuel accounts for under a sixth of what the rate pays out.

A worked US claim

Say you drive 8,400 business miles in a year. At the 2025 IRS business rate of 70 cents, that is a deduction of $5,880. Now price the fuel: a car averaging 32 mpg burns 262.5 gallons over that distance, and at $3.30 a gallon that is $866.25.

The remaining $5,013.75 is not profit. It is the wear you just put on the car. Those 8,400 miles knocked real money off its resale value, moved a service forward, and used up part of a set of tyres. The flat rate is a rough settlement for all of it, which is why the IRS lets you use it instead of keeping receipts for everything.

The UK two-tier rate

HMRC uses approved mileage allowance payments, which step down after 10,000 business miles in a tax year. Drive 12,000 miles and the calculation is 10,000 at 45p, giving £4,500, plus 2,000 at 25p, giving £500. Total £5,000.

The step matters if your employer pays a single flat rate. Suppose they reimburse 25p a mile across the board: on 12,000 miles you receive £3,000 against an approved amount of £5,000. You can claim tax relief on the £2,000 shortfall, which is worth £400 to a basic-rate taxpayer and £800 at higher rate. Plenty of people never claim it.

When the flat rate is worse than actual costs

The flat rate assumes an ordinary car driven an ordinary amount. It suits most people. It suits you badly if you drive something expensive that depreciates hard, if your annual mileage is low enough that fixed costs dominate, or if you had a large repair bill in the year.

In the US you can instead deduct actual expenses, tracking the real cost of fuel, insurance, repairs and depreciation, then claiming the business-use percentage. The catch is that the choice is partly locked in: if you use actual expenses with certain depreciation methods in the first year a car is in service, you cannot switch to the standard rate for that vehicle later. Run both ways once before you commit.

Using the mileage calculator

Enter the distance first. Your odometer readings at the start and end of each trip are the defensible source; a route planner's estimate is fine for planning but weaker if anyone asks questions. Then set the rate, either by picking the current official figure or typing the rate your employer actually pays.

If you are near the UK 10,000-mile threshold, enter your full annual business mileage in one go rather than trip by trip, so the calculator applies both tiers correctly. For a fuel-only comparison, you need the car's real mpg, which is best measured over a few tanks rather than taken from the manufacturer's figure. Our walkthrough on calculating gas mileage shows the fill-to-fill method, and the fuel cost calculator guide covers pricing a specific journey.

Common questions

Does commuting count as business mileage? No. Travel between home and your regular workplace is personal in both the US and the UK. Trips between work sites, to clients, or to a temporary workplace do count.

Do I need a mileage log? Yes, and it needs the date, the distance, the destination and the business purpose. Contemporaneous records are far stronger than a reconstruction from your calendar months later.

What if my employer pays more than the approved rate? In the UK, anything above 45p per mile on the first 10,000 miles is taxable as earnings and has to be reported. The excess, not the whole payment.

Can passengers add to a UK claim? They can. HMRC allows an extra 5p per mile for each colleague carried on the same business journey, though employers are not obliged to pay it.