Car Allowance Payments - Update

The Upper Tribunal judgement by Laing O’Rourke Services Limited and Willmott Dixon Holdings Limited vs HMRC has clarified the law concerning the interaction between car allowance payments and the national insurance contributions (NIC) relief available from such payments. HMRC have confirmed that they will not appeal this judgement, so the change is now effectively law. This impacts on many employers who offer car allowance payments.

Car allowances are frequently paid by employers for those employees who regularly undertake business journeys in their personal car. It is arguably the most well-known type of Relevant Motoring Expenditure (RME) paid by employers in the UK.

This judgment has confirmed that where an employee is reimbursed for mileage at below the Approved Mileage Allowance Payment (AMAP) the remainder or difference must be offset against other RMEs, such as the car allowance payment, reducing the NIC’s due for both employee and employer. At present, an employer can reimburse employees up to 45p per mile for qualifying business journeys.

As an example, if an employer pays 15p per mile and an employee does 1,000 business miles, then a 30p per mile difference can be offset against a car allowance payment, which would total £300.00 in this example.

By contrast, if an employer pays 45p per mile (the maximum currently available under AMAPs), no offsetting should occur for NIC purposes.

Practically, going forward, this means the car allowance payment must be split into two lines on the payslip. The first £300.00 is taxable but NIC free. The balance of the car allowance remains taxable and NICable.

Retrospective claims can be made by employers for the current tax year and the six previous tax years. Ink Payroll recognises that enacting this change is important for not only minimising employment costs, but also ensuring that their employees pay no more NICs that they legitimately should.