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July’s Upper Tribunal (Tax and Chancery Chamber) decision in the Laing O’Rourke/Willmott Dixon case has turned on its head everything we thought we knew about car allowances and what deductions are lawful through the payroll.

Tax legislation introduced in 2001, states that for employees using their own cars for business purposes they are either:

  1. Entitled to receive the approved mileage allowance payments tax and NIC free (currently 45p per business mile), or,
  2. If they are paid less than this figure (or have a fuel card) then the driver can claim mileage allowance relief (MAR) via a P87 claim, online claim or self-assessment tax return and the employer must give NIC relief for a similar amount via the payroll.

I say ‘must’ because the relief, or disregard as it is called, is mandatory in law.


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On my advice, many companies approached HMRC stating that they believed they had overpaid Class 1 NIC on their car allowances and they therefore asked for that NIC back.

The matter finally went to court and was settled in the ruling issued 10 July 2023.

That ruling also opens the door for any company that still has the relevant historic mileage records to put in a claim for a refund of NIC paid in error.

The judges stated that:

  1. The car allowance was RME and therefore the car allowance clearly fell within the definition of payments which are eligible for the 45p a mile offset.
  2. It did not matter how the amount of the car allowance was calculated and whether the car allowance was linked to grade. All that mattered was the employer’s purpose for making the payment.
  3. It did not matter if any particular employee did little or no business mileage. One employee’s circumstances could not affect the right of another employee to a statutory relief.
  4. It did not matter how or even if the employee spends the car allowance. The test is not about expenses incurred by the driver. Rather it is about expenditure by the company.

Both taxpayers won and are in line for a refund around £2 million each. Their staff are also entitled to an NIC refund.

The judgement effectively confirmed that if a driver does business mileage and they receive a separate payment in respect of the use of a qualifying vehicle (i.e. car allowance) then Para 7A mandates that the employer must give the driver relief against that car allowance before calculating NIC on the car allowance.

For example, an employee does 2,000 business miles a month and is paid 10p a mile.

The driver can claim personal income tax relief, but the employer must also give the driver relief (or disregard) of £700 against the car allowance (2,000 miles x 35p i.e. 45p minus 10p already paid).

If the car allowance is £600 a month, then none of it is subject to NIC. If the car allowance is £800 then NIC is due only on £100.

What if the employer does not give the driver relief? Well then you need to worry about unlawful deductions under S13 of the Employment Rights Act 1996.

What does it mean for HR departments?

Car allowances and contracts of employment should be reviewed and changed to make clear that the car allowance is being made to employees to ensure that they have a suitable car for undertaking business journeys and explain that it may be taxed in full but that it won’t be NI’d in full if the employee does any business mileage.

Payroll departments need to be advised to also apply the correct reliefs at source.

John Messore is an independent writer who specialises in compensation, benefits and payroll taxes 

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