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Car Allowances paid to Employees – Change of Approach for National Insurance

Date:
Category:General

If you pay a car allowance to employees, this has always been treated as fully liable to tax and National Insurance.

However, following two recent court cases which went against HMRC the approach has changed. Note this applies for National Insurance only, not tax. 

It applies where the mileage rate paid for business miles travelled is less than 45p per mile.

Example

If the car allowance is £500pm. 

Business mileage in the month is 1000 miles paid at 12p = £120.

For National Insurance, mileage could have been paid at 45p without any liability = £450.

The difference of £330 (£450-120) can now be set against the £500 car allowance paid, and only £170 is liable for National Insurance (employers and employees). 

It applies per “pay period” (monthly/weekly/ 4 weekly etc) as National Insurance is not calculated annually, so if the result is negative, nothing would be liable to National Insurance but you cannot carry forward the excess.

If in the above example , the mileage in the month was 2000 miles, the payment would have been £240, the allowable amount would have been £900, so the difference of £660 would be more than the actual car allowance. So the car allowance would not be liable to NI at all but the excess is lost.

It does not apply if there has been a Salary Sacrifice/Optional Remuneration arrangement for the car allowance.

Note for National Insurance purposes, the allowed mileage is 45p for all miles, it doesn’t fall to 25p after 10000 miles per tax year as it does for tax.

Hence, even if paying the full HMRC Approved Mileage Rate, if the employee travels more than 10000 business miles in a year, so the payment drops to 25p per mile later in the tax year, then this will apply once that happens.

It’s important that this is dealt with correctly or employers will be taking too much National Insurance from employees and, of course, paying too much Employers NI themselves. 

It is possible to do a backdated claim for this. You must have full records of mileage travelled by the relevant employees in any past years you are making a claim.

Any claim could go back for tax years.

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