Advisory Fuel Rates – What are AFRs and why do they matter?

If your business provides company cars or reimburses employees for business mileage, then Advisory Fuel Rates (AFRs) are something you need to stay on top of.

Set by HMRC and updated quarterly, AFRs are the recommended rates you can use to reimburse employees for business travel in a company car without the payment being treated as a taxable benefit.

So, what exactly are these rates? And why do they matter to owner-managed businesses?

What are Advisory Fuel Rates?

AFRs are mileage rates per fuel type and engine size, designed to reflect average fuel costs. They apply where:

• The company car is used for business travel
• The employee pays for the fuel
• The employer reimburses them using HMRC’s rates

If you use AFRs correctly, there’s no tax or National Insurance liability for the employee, and no need to report the reimbursement to HMRC.

• If you pay more than the advisory rate, the excess is generally treated as a taxable benefit.
• If you pay less, the employee may not be fully reimbursed for their costs.

Why do AFRs matter?

For growing, owner-managed businesses, AFRs are a useful tool for:

• Keeping employee reimbursements tax-efficient
• Maintaining simple and compliant expense policies
• Ensuring input VAT on fuel can be reclaimed (when supported by a VAT receipt)

They also help ensure consistency so that everyone in the business is reimbursed fairly, based on the same official benchmark.

What about hybrid and electric vehicles?

Hybrid vehicles fall under petrol or diesel rates, depending on their fuel type.

For fully electric vehicles, HMRC sets a separate Advisory Electricity Rate, which is currently 7p per mile (as of June 2025).

Reclaiming VAT

If you’re reimbursing fuel costs using AFRs, you may be able to reclaim VAT on the fuel portion of the mileage, provided:

• You have a valid VAT receipt from the employee
• You apply the AFR correctly to identify the fuel element

For example, if the AFR is 21p per mile, 3.50p of that may be reclaimable as input VAT (21p × 1/6).

Staying compliant

AFRs are updated by HMRC every three months (typically on 1 March, 1 June, 1 September and 1 December). You can use the previous rates for up to one month after new rates are released, but it’s good practice to update your internal systems promptly.

The rates as at 1 June 2025 are:

Note

• For hybrid cars you must use the petrol or diesel rate.
• For fully electric vehicles the rate is 7p per mile.
• You can continue to use the previous rates for up to 1 month from the date the new rates apply.

What if employees use their own vehicles?

AFRs only apply to company cars. If an employee uses their own vehicle for business, you’ll need to use the Approved Mileage Allowance Payments (AMAPs):

• Cars and vans: 45p per mile for the first 10,000 business miles; 25p per mile after that. Plus 5p per mile for each passenger carried on business journeys.
• Motorcycles: 24p per mile for the first 10,000 business miles; 24p per mile after that
• Bicycles: 20p per mile for the first 10,000 business miles; 20p per mile after that

These payments are tax-free and NIC-free when paid within the thresholds.

How can we help?

We’re here to help you stay compliant, recover VAT where appropriate and keep things efficient. If you have questions relating to the provision of company cars, get in touch with your usual adviser, complete our contact form or call 0161 905 1616.