Changes to taxation of mileage payments create potential for employers to reclaim overpaid NICs

In 2023 the Upper Tax Tribunal gave judgement in the case of Laing O’Rourke Services Ltd v HMRC in which the Tribunal introduced a change in the way that National Insurance Contributions (NICs) are charged on companies’ mileage payments to employees. HMRC has now indicated that they will not be appealing this decision, so for the moment Laing O’Rourke can be considered the law of the land.

How are mileage payments taxed?

To understand the impact of the decision in Laing O’Rourke it is helpful briefly to review the income tax context. It is common practice for employers to pay their employees a ‘car allowance’ (a fixed amount to cover the costs of the employee providing their own vehicle for business use). Additionally, employers often make mileage payments of ‘X’ pence per mile to those employees as a contribution towards fuel expenses. Assuming that the necessary statutory requirements are met, these types of payments to employees attract different treatment for income tax and NICs, which can be broadly summarised as follows:

What does this mean?

Prior to Laing O’Rourke, companies will generally have been paying full employer and employee NICs on any car allowance payments they made. Post Laing O’Rourke, companies may want to consider whether they can make a claim to HMRC for a refund of incorrectly paid NICs on their car allowance payments to the extent to which they are lower than the statutory approved mileage payments. The look back period for such claims is six years, so for businesses that regularly make car allowance payments these could amount to significant refunds.

Additionally, employers may wish to review how they are administering car allowance and mileage payments going forwards and how they are described in staff contracts to ensure that they are not overpaying tax going forwards.