NIM05715 | Class 1 NICs: Expenses and allowances: Mileage allowances: Rules before 6 April 2002: Use of HMRC's Authorised Mileage Rates

From HM Revenue & Customs · National Insurance Manual

Since 6 April 1996, employers have been able to establish whether there is a Class 1 NICs liability on the mileage allowances they pay to employees for business travel. They do this by comparing them to HMRC’s Authorised Mileage Rates (AMR).

HMRC’s AMRs are considered to be sufficiently generous to normally be certain that they fully cover the business proportion of all standing and running charges.

Guidance on HMRC’s AMRs is given at EIM31240.

If the mileage rate an employer pays for business travel is greater than the appropriate AMR rate, Class 1 NICs are due on the amount of the employer’s rate that exceeds the AMR rate – the profit element explained at NIM05708.

For NICs, only the “up to 4,000 miles AMR rate” is used, irrespective of the number of business miles travelled.

Example 1 - No Class NICs due

Employee claim specifics	period claimed/engine capacity/mileage/approved rates
Tax year	2001/02
Engine capacity of employee’s car	1800
Business mileage	10,000
Mileage allowance paid by employer	45p for first 4,000 miles
Mileage allowance paid by employer	25p for every mile above 4,000 miles

In this example, the employer’s mileage allowances are the same as HMRC’s AMRS, see EIM31240, so there is no element of profit. As a result, the amounts paid are not earnings and no Class 1 NICs are due.

Example 2 - Class 1 NICs due

Employee claim specifics	Period claimed/engine capacity/mileage/approved rates
Tax year	2001/02
Engine capacity of employee’s car	1800
Business mileage	10,000
Mileage allowance paid by employer	60p per mile for first 4,000 miles
Mileage allowance paid by employer	25p per mile for every mile above 4,000 miles

In this example, the employer’s mileage allowances are more than HMRC’s authorised mileage rates for the first 4,000 miles , see EIM31240. The amount paid for miles above 4,000 is the same as HMRC’s AMRs. The excess paid above HMRC’s AMRs, in this case 15p per mile for the first 4,000 miles is profit from the employment on which Class 1 NICs are due.

Where a profit exists within an employer’s mileage rate, that amount should be added to any other earnings paid to the employee in the earnings period in which the mileage allowance is paid and Class 1 NICs assessed on the aggregated amount.

The use of HMRC AMRs to establish profit was not compulsory for periods to 5 April 2002. An employer who did not favour using this method could have dispensed with mileage rate comparisons altogether and assessed NICs in accordance with regulation 26 and paragraph

3 of Part 8 of Schedule 3 to the 2001 Regulations - travelling expenses rules, see NIM06240; and
9 of Part 8 of Schedule 3 to the 2001 Regulations - specific and distinct payments of, or towards, expenses actually incurred, see NIM05020.

An employer who took this approach may have found that the payment that was subject to NICs was greater than the payment which would have been subject to NICs if the appropriate AMR had been applied. This is because use of the “up to 4,000 mileage rate” for all business miles travelled generally produced a more generous NIC free amount than the specific and distinct expense rule explained at NIM05708.