Putting the brakes on excessive National Insurance payments through car allowances
Released On 3rd Mar 2024
Businesses may be able to reclaim significant amounts of National Insurance Contributions (NICs) and plan for future savings because of a recent Tribunal ruling on how car allowances are taxed.
Brought by Wilmott Dixon and Laing O’Rourke in their capacity as employers, the Tribunal upheld the firms’ argument that car allowance payments should qualify for Class 1 National Insurance relief.
HM Revenue & Customs (HMRC) subsequently repaid approximately £146,000 to these businesses as a result of the Tribunal.
It has further stated that it will not appeal the decision – an announcement which carries significant implications for other employers that provide a car allowance.
What is the car allowance?
A car allowance is a type of benefit that may be provided to employees in place of a company car.
It is typically a monetary benefit on top of an employee’s salary to allow them to lease or buy a car for work purposes or to maintain the one they own owing to additional, work-related use.
An employer can provide a car allowance to any employee, but most are given to those who spend a lot of time travelling, such as sales staff or managers who oversee more than one site.
It may also be given as an attraction and retention benefit.
Is the car allowance taxed?
Because they are paid as part of an employee’s salary, car allowance payments are normally subject to tax and NICs – for both the employer and employee.
However, work-related travel is also subject to a fuel or mileage allowance.
This is a reimbursement which is not subject to tax if paid at or below the ‘approved amount’ – 45p per mile for the first 10,000 miles and 25p after that.
What decisions have been made?
The Tribunal ruled that a car allowance should be defined as ‘relevant motoring expenditure’ (RME) and can, therefore, be used to offset below-standard mileage reimbursement.
For example, if your company car policy states that employees will be reimbursed at 20p per mile and an employee drives 500 miles, this leaves a difference of 25p per mile – totalling £125.
When you come to pay the car allowance for this person, the first £125 will be taxable as part of the employee’s salary but will not be subject to National Insurance.
This could represent a significant saving for employers that provide a car allowance in place of a company car.
How will this affect me?
If you offer mileage reimbursement and a car allowance to your employees, you could stand to save a substantial amount on your employer NI contributions.
It could also open the door for business owners to reclaim overpaid NICs under this latest clarification.
The Tribunal also accepted that, if your business policies state that a certain number of miles are not reimbursable, then these miles must also be offset against other RMEs.
Benefits all round
The Tribunal’s ruling could make car allowances an attractive benefit to both employers and employees over, for example, a company car.
Tax regulations regarding benefits and NICs can be complex and are likely to change further as these new precedents take effect.
To stay compliant, it is important to remain updated on your tax obligations and work with your accountant to ensure you are paying the correct amount of National Insurance. For tailored advice on benefits, company cars, travel allowances and tax, please contact us today.
