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HMRC internal manual

National Insurance Manual

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HM Revenue & Customs
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Class 1 NICs: Expenses and allowances: Mileage allowances: Rules before 6 April 2002: Liability for Class 1 NICs

Section 3(1)(a) of the Social Security Contributions and Benefits Act 1992

Regulation 25 and paragraphs 3 and 9 of Part 8 of Schedule 3 to the Social Security(Contributions) Regulations 2001 (SI 2001 No 1004)

In order for a Class 1 NICs liability to arise, a payment for motoring expenses, likeany other payment, must represent ‘remuneration or profit derived from anemployment’ see NIM02010.

Mileage allowances for private travel

Where mileage allowances are paid for private motoring the payments are remuneration orprofit derived from an employment. They are earnings.

Mileage allowances for business travel

Where a mileage allowance is paid for business travel the employee must profit from thepayment if it is to be considered earnings.

If a payment is a reimbursement of an actual business expense incurred by the employee inthe course of their employment, the reimbursement is not remuneration or profit derivedfrom the employment and so cannot be liable for NICs.

If a payment is a round sum allowance, but the actual business expense incurred by theemployee in the course of their employment can be identified, that expense is notremuneration or profit derived from the employment so is not liable for NICs. Any amountthat cannot be identified as a business expense is earnings and should be included ingross pay with any other earnings paid in the same earnings period.

Like other business related travelling expenses, the legislation covering mileageallowances to 5 April 2002 is regulation 25 of the Social Security (Contributions)Regulations 2001 and, in particular,

  • Paragraph 3 of Part 8 of Schedule 3 to the 2001 Regulations - Travel expenses, see NIM06240
  • Paragraph 9 of Part 8 of Schedule 3 to the 2001 Regulations – specific and distinct expenses, see NIM05020.

Liability for Class 1 NICs

Liability for Class 1 NICs arises:

  • on reimbursed private motoring expenses. That is, on the full extent of mileage payments paid to employees who use their own cars for private travel, regardless of whether the employer meets this cost by payment of a mileage allowance or by some other means, for example, settling the employee’s fuel bills.
  • on that amount of a mileage allowance paid for business travel which exceeds the actual expense incurred by the employee – the profit element.

Identifying the business expenses

In relation to mileage allowances generally, whether or not they are based on a mileagerate, employers are likely to find it very difficult to comply with the requirements ofparagraph 9 of Part 8 of Schedule 3 of the SS(C)R 2001 and identify the exact profit on apay period basis.

This is because:

  • although it might seem relatively straightforward to identify specific fuel costs in a particular earnings period, it is only at some future date, when the amounts spent on servicing and replacement parts are known, that an employer can make any attempt to calculate an employee’s full expenditure on business travel, and
  • keeping precise records to identify the business and private elements of, for example, the cost of an annual service, can be a complex, costly and time- consuming process.

In recognition of these difficulties, an administrative arrangement operates for NICs.The arrangements allows an employer to calculate whether there is any profit included inthe payments he makes to employees who use their own cars for business purposes. Thisarrangement allows an employer to calculate and pay any NICs liability on mileageallowances in the appropriate earnings period.

This administrative arrangement is explained at NIM05710.