Where an employee (or director) uses his or her own car for business journeys, it is usual for the employer to pay a mileage allowance.  From 6 April 2002 , the Inland Revenue has agreed a tax-free mileage allowance of 40p a mile for the first 10,000 business miles covered in the tax year, falling to 25p a mile thereafter, irrespective of the size of car used.  If an employer pays less than 40p (or 25p) a mile, the employee will be able to claim a tax allowance for the balance, but the employee will no longer have the option of claiming the actual cost of business journeys. This allowance remains unchanged for the tax year commencing 6 April 2003 and 6 April 2004.

This ‘one size fits all’ scheme is designed to encourage people to use smaller cars for their business motoring.  Anyone using a large car for business journeys will have to pay part of the cost out of his or her taxed income, but someone driving a very small car may be able to make a profit at the taxman’s expense.