When it comes to mileage tax claims, there are two separate schemes for consideration: one for tax itself, and the other for NIC, or National Insurance Contributions. Employees who use their own vehicle for working purposes are entitled to payments that are free of both tax and NIC. The rules for each are similar, but have their own distinct features.
If an employee gets a bigger amount than he or she is allowed tax-free, tax will be paid on the excess. Similarly, if he or she receives a bigger amount than is allowed before NIC kicks in, both the employee and employer are liable for the excess, against Class 1 National Insurance Contributions. However, if an employee receives a lesser sum than the limits allow for tax and NIC purposes, no NIC payments will be required, and tax relief becomes available.
How do NIC rules differ from tax?
They differ in various ways and involve a wider array of expenses. NICS apply to payments of RMEs, or Relevant Motoring Expenditure, that occur over a certain level. This RME calculation covers:
Mileage Allowance Payments or MAPS
Any payments that would be classified as MAPs, if it weren’t that they were paid to a person other than that employee (albeit, to the benefit of that employee).
Other payments made to the employee that relate to their vehicle usage for both business and private purposes, with the exception of payments in kind.
Every period there is a maximum amount of Relevant Motoring Expenditure that can be ignored for NIC purposes. This is known as the QA, or qualifying amount.
Multiply your employee business miles for the earnings period in question, by the applicable rate – usually 45p a mile for cars and vans. If an employer made an RME payment for 1,000 business miles, driven by a staff member in their own car, the qualifying amount would be 1,000 x 45p, or £450 in that qualifying period. If this exceeds the qualifying amount, the employer will add the excess to the employee’s other earnings within that period, to calculate their Class 1 NICS via the payroll. If the RME amount is less than the qualifying figure, then there is nothing for the employer to report, and no NICs to pay.
An employee calculates that he or she has travelled 500 business miles within an earning period. The only RME that applies is the reimbursement at a rate of 50p, at the conclusion of the earnings period. The NIC position would be established as follows, for the year 2012-3.
Firstly, the REM would be £250 – 500 miles x 50p.
The qualifying amount would be £225 – 1000 miles x 45p
The excess would therefore be £25 – that is, £250 – £225
The employer would add this excess to the in-period earnings of that employee, and use this total figure to calculate the NIC Class 1s.
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