Could you reclaim NIC on car allowances paid to your employees?

Two recent tax cases mean employers may be able to reclaim NIC paid on car allowances – how does this affect you?

Can you reclaim NIC on your car allowances?

Two taxpayer wins at the Upper Tribunal mean employers may be able to reclaim NIC if they pay employee car allowances (via payroll) and reimburse business mileage at a rate of less than 45p per mile. For some employers, the potential NIC reclaims could be significant. It is not yet known whether HMRC will appeal, but to protect their positions – and those of their employees – employers should review any car allowance payments they make and consider whether it would be appropriate to submit a protective claim.


In the recent Laing O’Rourke and Willmott Dixon cases, both employers had car schemes that let participants choose between a company car and a cash allowance. Employees who chose the cash allowance had to maintain a private vehicle suitable for business use, but there was no requirement to spend the allowance, which was based on the employee’s seniority, on motoring expenses.

Both employers maintained that the car allowance payments represented ‘relevant motoring expenditure’ which, whilst in principle is subject to NIC, also allows for relief on the ‘qualifying amount’ of 45p per business mile travelled less any business mileage reimbursed. HMRC disagreed.

The First-tier Tribunal (FTT) and Upper Tribunal (UT) decisions

Both employers appealed to the Tribunals, and the UT recently handed down its decisions on subsequent appeals from the FTT.

In summary, the UT held that ‘relevant motoring expenditure’ should be given a broad meaning, and includes payments for the expected use, potential use, and availability for use of a qualifying vehicle – not only its actual use. The UT also held that the fact car allowance payments were quantified by reference to employees’ grades, and there was no requirement for participants to spend the relevant sums on motoring expenses, were irrelevant. And that merely because allowances were paid to some employees who did no business mileage should not impact on claims for NIC relief for those who did.

The ‘qualifying amounts’ of car allowance payments made to employees who travelled business miles were therefore eligible for NIC relief.  

‘Qualifying amounts’ are essentially business miles travelled at 45p per mile. Most employers will have provided relief on some of the qualifying amount where business mileage is reimbursed income tax and NIC free at a rate less than 45p per mile.

Why these decisions matter

These decisions represent important taxpayer wins and, unlike FTT judgments, set a binding precedent.

Employers who pay cash allowances under employee car schemes comparable to those in Laing O’Rourke and Willmott Dixon may therefore be able to reclaim employer’s NIC on car allowances paid as far back as 2017/18 (or earlier, in certain circumstances) and for subsequent tax years. This also represents an important opportunity for employers to support employees to submit claims for tax relief on qualifying amounts.

What should employers do?

It is not yet known whether HMRC will appeal the UT’s decisions. However, employers should act now to consider submitting protective claims before earlier tax years become time barred.

Specific questions employers should consider when assessing their position include:

  • Do your car allowance payments represent ‘relevant motoring expenditure’? – Whilst the UT held that ‘relevant motoring expenditure’ should be given a broad meaning, employers considering a claim must still be able to demonstrate that their car allowance payments are comparable to those in Laing O’Rourke and Willmott Dixon and so fall within its scope – in particular, was there a sufficient obligation on your employees to maintain a private car for business use? A review of your car policy documents and employment contracts will assist in addressing this point;
  • What’s the NIC at stake? – In summary, the total car allowance payments eligible for NIC relief will be based on 45p per business mile travelled (less any business mileage reimbursed). The actual cash savings will be driven by the rates of employer’s and employee’s NIC for each tax year, multiplied by the number of participating employees. Claims can go back to 2017/18 and, in certain circumstances, earlier years (e.g., if 250 employees completed 10,000 business miles each year which were reimbursed at 15p per mile, the employer’s NIC saving at 13.8 percent would be £103,500 for each year for which a claim could be made. There would also be a corresponding refund claim for the employee NIC.);
  • Did employees sacrifice or otherwise choose to forgo earnings in return for a car allowance payment? Car allowance payments made on or after 6 April 2018 under ‘optional remuneration’ or other salary sacrifice arrangements are not eligible for NIC relief. This is a complex area of legislation that is relatively untested and, in some cases the position will not be clear so it’s important to examine in detail precisely how your car allowance scheme works;
  • What information do you need to support a claim? – It will be necessary to demonstrate that your process for documenting and reimbursing the business miles travelled each year was robust – consider your systems, whether you can access the relevant data, and how far it goes back;
  • How will you process any claims? – This is likely to need to be done by your payroll team or adviser amending Real Time Information returns; and
  • How should you communicate with employees? – Where available, NIC relief would extend to employees as well as employers, but it is likely to be most efficient for employers to administer any claims on their behalf, but employers should manage employees’ expectations on the likely timescales and the possibility of HMRC successfully appealing the UT decision.

KPMG has extensive experience assisting employers to reclaim NIC on relevant car allowance payments. If you would like to discuss this, or any aspect of your company car arrangements, please contact the authors or your usual KPMG in the UK contact.