Could You Be Entitled to a National Insurance Refund on Car Allowances?

Understanding the nuances of motoring expenses for tax and National Insurance purposes is crucial for both employers and employees. Specifically, when employees use their personal vehicles for work-related travel, they are often compensated through mileage allowances or car allowances. However, a recent tribunal decision has shed new light on what constitutes ‘relevant motoring expenditure’ (RME) for National Insurance contributions (NICs), potentially opening the door for refunds.

Tax-Free Mileage Allowances

For tax purposes, employees reimbursed for using their own cars for business travel can receive tax-free payments up to an approved amount. This amount is determined by multiplying the business mileage by the approved rate—45p per mile for the first 10,000 business miles and 25p per mile thereafter.

National Insurance and Relevant Motoring Expenditure

While similar rules apply for National Insurance, the definition of RME, which is excluded from NICs computations, traditionally had a narrower interpretation by HMRC. However, a landmark tribunal decision has broadened this definition to include not only payments for actual car use but also for potential and anticipated business use. This reinterpretation means that car allowances, previously fully subjected to NICs, might now qualify as RME up to the approved amount—45p per mile for all business miles, without a reduction after 10,000 miles.

Implications of the Tribunal Decision

This ruling indicates that NICs may have been overpaid on car allowances under the old interpretation of RME. For example, if an employee received a £300 car allowance in a month and drove 500 business miles, £225 of this allowance should be considered RME and thus disregarded for NICs. Previously, the entire allowance might have been treated as earnings subject to NICs.

Claiming a Refund

Employers who believe they’ve overpaid NICs due to this revised understanding of RME can seek refunds. Corrections can typically be made through Real Time Information (RTI) submissions, requiring detailed evidence of business mileage, car allowance payments, and the NICs sought for refund. If RTI adjustments are not feasible, written claims must be submitted to HMRC with comprehensive documentation and justification.

Reviewing Your Records

This development urges employers to meticulously review their records for car allowances paid to employees who use their personal vehicles for business purposes. There may be a significant opportunity to reclaim overpaid NICs, aligning past payments with the tribunal’s broader definition of RME.

Employers and employees alike should be aware of these changes and consider consulting with a tax professional to navigate the complexities of claiming any potential refunds. This adjustment not only impacts future NIC calculations but also offers a chance to rectify past overpayments, ensuring that motoring expenses are treated fairly and accurately for National Insurance purposes.

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