NIM05708 - 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

The position before 06 April 2002 was that in order for a Class 1 NICs liability to arise, a payment for motoring expenses, like any other payment, must have represented ‘remuneration or profit derived from an employment’ see NIM02010.

Mileage allowances for private travel

Where mileage allowances were paid for private motoring the payments were remuneration or profit derived from an employment, these were treated as earnings. These continue to be treated as earnings after 06 April 2002.

Mileage allowances for business travel

Where a mileage allowance was paid for business travel the employee must have profited from the payment for it to have been considered earnings.

If a payment was a reimbursement of an actual business expense incurred by the employee in the course of their employment, the reimbursement was not remuneration or profit derived from the employment and so could not be liable for NICs.

If a payment was a round sum allowance, but the actual business expense incurred by the employee in the course of their employment could be identified, that expense was not remuneration or profit derived from the employment so was not liable for NICs. Any amount that could not have been identified as a business expense was earnings and needed to be included in gross pay with any other earnings paid in the same earnings period.

Like other business related travelling expenses, the legislation covering mileage allowances 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 arose:

  • on reimbursed private motoring expenses. That is, on the full extent of mileage payments paid to employees who used their own cars for private travel, regardless of whether the employer met 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 exceeded the actual expense incurred by the employee – the profit element.

Identifying the business expenses

In relation to mileage allowances generally, whether or not they were based on a mileage rate, employers were likely to have found it very difficult to comply with the requirements of paragraph 9 of Part 8 of Schedule 3 of the SS(C)R 2001 and identify the exact profit on a pay period basis.

This was because:

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

In recognition of these difficulties, an administrative arrangement operated for NICs.The arrangements allowed an employer to calculate whether there was any profit included in the payments he made to employees who used their own cars for business purposes. This arrangement allowed an employer to calculate and pay any NICs liability on mileage allowances in the appropriate earnings period.

This administrative arrangement that applied is explained at NIM05710.