A common alternative to providing employees with a company car is to pay them a car allowance each month. This avoids the need to complete
P11Ds, but comes with its own set of tax and National Insurance contribution (NIC) complications.
The car allowance is taxed the same way as the employee’s salary, so is subject to tax and National Insurance and the employer also has to pay National Insurance contributions.
On top of the car allowance, the employer may reimburse the employee for business miles. The mileage claim, up to the HMRC limits of 45p per mile (25p after the first 10,000 miles), is exempt from tax and National Insurance Contributions.
Where the employer pays less than the approved mileage rate, the employee can claim a refund of tax on the difference. They can also go back up to four years to claim. This includes employees who are paid a car allowance.
Furthermore in December 2023 an Upper Tribunal decision ruled that employers may be able to claim a refund of NICs on car allowances paid to employees.
Whether or not a refund can be claimed will depend on each business’s circumstances. Broadly speaking, if you are able to answer yes to the following questions a claim may be possible:
- Do you pay car allowances (or similar payments) to employees, broadly in respect of an employee’s use of a vehicle?
- Are those allowances subjected to Class 1 NIC?
- Are all or some of the employees in receipt of a car allowance expected to undertake, and do undertake, business mileage?
- Are those employees reimbursed business mileage at below the approved business mileage rate (currently 45p per mile for NIC purposes) or not reimbursed for business mileage at all?
- Are appropriate mileage records maintained to support business mileage claims (even where no mileage is reimbursed)?
Claims can be made for employer’s and employees’ Class 1 National Insurance contributions.
Claims can be made for refunds going back six tax years (as opposed to the four years for tax purposes), meaning employers paying car allowances in the right circumstances can, up until 5 April 2025, submit claims for employer’s and employee’s NICs on car allowances going back to and including the 2018/19 tax year. Having good mileage records to support the claim is key.
Looking forwards, it would be worth considering how to ensure savings are made in a timely manner and also discuss ways to simplify the structure and reporting of car and mileage payments.
For further advice, please contact your
local Moore office.