A recent Tribunal decision regarding the taxation of car allowances has opened the door for businesses to recover substantial National Insurance Contributions (NICs) and to strategise for future cost reductions.
The case, initiated by employers Wilmott Dixon and Laing O’Rourke, successfully argued for Class 1 National Insurance relief on car allowance payments, leading to a ruling in their favour.
As a consequence of this Tribunal’s decision, HM Revenue & Customs (HMRC) has refunded around £146,000 to these companies and announced it will not challenge the ruling, a move that holds significant implications for other employers offering car allowances.
Understanding car allowances
Car allowances serve as an alternative to providing a company car, offering employees a financial sum in addition to their salary for the leasing or purchase of a vehicle for work, or for the upkeep of their own vehicle due to increased work-related use.
Typically awarded to employees who travel frequently for work, such as sales personnel or managers of multiple locations, car allowances can also serve as an incentive for employee attraction and retention.
How car allowances are taxed
Traditionally, car allowances, being part of an employee’s remuneration, are subject to both tax and NICs from both the employer’s and employee’s side.
However, employees can receive tax-free mileage or fuel allowances for work-related travel, up to the ‘approved amount’ of 45p per mile for the first 10,000 miles and 25p for each subsequent mile.
The Tribunal’s findings
The Tribunal determined that car allowances count as ‘relevant motoring expenditure’ (RME), allowing them to be accounted for against lower-than-standard mileage compensations.
For instance, if an employer reimburses at 20p per mile and an employee travels 500 miles, the 25p per mile shortfall equates to a £125 difference.
Thus, when calculating the car allowance, the initial £125 is taxable but exempt from National Insurance, offering a potential saving for businesses opting for car allowances instead of company cars.
Impact on employers
Employers providing car allowances alongside mileage reimbursements may see significant reductions in employer NICs.
This ruling also paves the way for businesses to seek refunds for previously overpaid NICs, based on the recent clarification.
Moreover, the Tribunal acknowledged that unreimbursed miles under company policies should be considered against other RMEs.
Advantages for employers and employees
This Tribunal decision potentially makes car allowances a more appealing option than company cars for both employers and employees.
Given the complexity of tax laws and the likelihood of future changes, maintaining compliance requires staying informed about tax duties – and we’re always here to help.
