National Insurance on Car Allowances
Are you due a repayment?

There has been a developing story over several years regarding HM Revenue & Customs (HMRC) interpretation of the legislation regarding the National Insurance (NI) treatment of car allowances for employees using their own vehicles for work.

The issue concerns employees who have had mileage reimbursed at less than the authorised mileage rate of 45p per mile, & who have also received a car allowance that has been subject to NI through the payroll.

For tax purposes, an employee reimbursed at (say) 23p per mile for using their own car for work, can claim tax relief on the additional 22p per mile on their tax return or by submitting a P87 form to HMRC each year.

There has never been a similar process for NI because HMRC have always argued that a round sum car allowance is subject to NI in full as it is not “relevant motoring expenditure.” However, the judges in a case at the Upper Tribunal have ruled that HMRC’s view was incorrect. HMRC have not appealed.

By way of an example, let’s consider an employee with the following circumstances:

• They travelled 5,000 miles during the tax year for the purposes of their employment & were reimbursed (free of tax & NI) at a rate of 23p per mile
• They were given a car allowance of £3,600 for the year, which was subject to tax & NI through the payroll

As long as it can be shown that the car allowance was made either for actual use of the employee’s vehicle for work purposes or in respect of potential or anticipated use of the employee’s vehicle for work then in these circumstances, the difference between the amount that has been received free of NI (23p) & the amount that could have been received free from NI (45p) can be deducted from the car allowance before the NI liability on that allowance is calculated.

This would have saved the employee £132 & the employer £151.

HMRC have issued some guidance for employers to claim a repayment of any overpaid NI. The deadline for claiming is six years after the end of the tax year. The claim has to be made by re-submitting the payroll submissions backed up with the following evidence for each pay period:

  • Employee names & National Insurance Numbers
  • Business miles travelled by each employee included in the claim
  • The car allowance paid
  • The mileage paid
  • The amount of NI that is being reclaimed

The employee’s NI element of the claim would need to be passed on to the employee by the employer making the claim.

If an individual’s employer has not made a claim, they can make one themselves but HMRC’s advice is that they should contact their employee first.

If you think this might be relevant to you, please contact a member of our payroll team, who will be happy to advise further.