Mileage matters: Inland Revenue’s 2026 rates are here

By Andrea Scatchard, Mihiri Nakauchi & Rosall Henry

We are sure many readers have been waiting with interest for Inland Revenue’s latest kilometre rates. Inland Revenue has now released the rates for the 2026 income year, and given recent increases in fuel prices and broader cost pressures, this year’s update is likely to be particularly relevant for businesses and their employees.

Following last year’s more significant overhaul, which expanded the framework to eight different rates across petrol, diesel, petrol hybrid and electric vehicles, the 2026 update is comparatively straightforward with just an upwards adjustment to all but one the various rates. The largest increases are for electric vehicles, while for petrol vehicles only the Tier 1 rate has increased. This seems counter intuitive given the large increase in petrol prices over the last 6 months, but is a reflection of the fact that the rates are set using data from the year to March 2026 so do not fully include the impact of current petrol prices.

What do I need to remember?

The Commissioner must regularly set kilometre rates, which can be used by self-employed taxpayers and close companies to work out deductible vehicle costs under the kilometre rate method.

In practice, these rates are also widely used by employers reimbursing employees for the work use of their personal vehicles. Where the reimbursement does not exceed the published rates, it can generally be paid tax-free.

A key point to remember is that the rates operate on a two-tier basis:

• Tier One applies to the business portion of the first 14,000 kilometres of total travel for the year, including private use. This tier is intended to cover both fixed and running costs.
• Tier Two applies to any travel reimbursed beyond the Tier One limit and is intended to reflect running costs only.
  

Using these rates is optional, not mandatory. Business owners may instead choose to claim deductions using the cost method, based on actual expenditure. Similarly, employers are not restricted to reimbursing at the Inland Revenue published rates, and may choose to pay more or less. However, where a higher rate is used, records should be retained to demonstrate that the reimbursement represents a reasonable estimate of expenditure.

Self-employed and close companies

If you are a sole trader or qualifying close company and choose to use the kilometre rate method to claim business vehicle costs, the 2026 kilometre rates apply for the 2026 year – that is, from 1 April 2025 to 31 March 2026 for taxpayers with a standard balance date.

If you were ahead of the game and have already filed your 2026 income tax return using the 2025 kilometre rates, you may still be able to correct the position. In some cases, the difference can be self-corrected in your 2027 tax return depending on the quantum of the adjustment.

Where the difference between the amount originally claimed and amount available under the 2026 rates is material, a Notice of Proposed Adjustment may be required instead. This option is only available within four months of filing the income tax return.

Employers

If you are an employer reimbursing employees for work-related travel, the 2026 kilometre rates apply to reimbursements made on or after 4 June 2026, being the date the new rates were issued.

Where your reimbursement policy says employees will be paid at the Inland Revenue rate, you should update the rate paid as soon as possible. If there is a delay in implementing an increased rate, although it does not create a PAYE issue, employees may be temporarily disadvantaged.

Inland Revenue has acknowledged that the current kilometre rates may not always be the best proxy for employee reimbursement costs, given they are based on prior-year vehicle expenditure data. Inland Revenue has said it is considering further reimbursement guidance for the 2027 income year, due to the increase in fuel prices. In the meanwhile, employers can continue using the 2026 kilometre rates for reimbursement purposes or adopt another method that reflects a reasonable estimate of employee expenditure.

If your reimbursement policy sets a fixed rate for work related mileage and the rate is lower than the new Inland Revenue rate, no immediate action is required. The reimbursement can still be paid tax free, although employees may well ask for the rate to be reviewed in light of the increase.

For more information about applying the new kilometre rates or mileage reimbursement options, please contact your usual Deloitte adviser.