NIC on Cash car allowances: can you reclaim?
In 2023, the Upper Tribunal (UT) settled two employer cases, creating an opportunity to treat cash car allowances as exempt from National Insurance Contributions (NIC). Employers may now be able to reclaim employer and employee NIC paid in the previous six tax years – and reduce the amount they pay going forward.
Upper Tribunal ruling on cash car allowances and NIC
The UT decision concerned two employers, Laing O’Rourke and Willmott Dixon. In brief, the decision centred on NIC legislation which classifies payments as Relevant Motoring Expenses (RME) – such payments may benefit from a disregard, or exemption, from NIC and therefore be paid without the operation of employer and employee Class 1 NIC.
According to the relevant legislation, these payments must be made “in respect of the use…of a qualifying vehicle.” The UT determined that this should be construed widely and can extend to future use, whether or not the employee bears the cost of that use.
The opportunity to reclaim historic paid NIC
Many employers historically operated flat‑rate car allowances or combined cash‑and‑mileage structures that may now satisfy RME criteria, despite being treated as fully NIC‑able at the time. This means there is genuine opportunity for employers to reclaim employer and employee Class 1 NIC dating back up to six tax years.
However, RME criteria must be satisfied, and so a detailed review must be carried out before any reclaim is made. Employers need to confirm that the relevant conditions and fact pattern are met, with mileage records to support the reclaim.
Employers should also check that all mileage reimbursements are for genuine business purposes – not private travel such as ordinary commuting – to avoid HMRC scrutiny.
Where a valid reclaim opportunity exists, several methods are currently available. The right approach will depend on the nature of the business and its relationship with HMRC – including whether it has a dedicated Customer Compliance Manager (CCM).
It is also worth noting that HMRC are planning to introduce some automation to the refund process to make this more efficient.
How to reduce future NIC on cash car allowances
Regardless of whether a reclaim is made, employers have the opportunity to ensure that cash car allowances are not unnecessarily subject to unnecessary Class 1 NIC.
Inaction carries its own risk. Where an RME NIC refund may be due, failing to act exposes the employer to claims from affected employees. If eligible for a refund, the employer will have overpaid employee’s NIC and deducted more than it was lawfully entitled to from employees’ earnings.
This means employees – or a union acting on their behalf – can bring an unlawful deduction from wages claim under the Employment Rights Act 1996 against their employer. If successful, repayment would come from the employer, not HMRC.
To mitigate this risk, employers should explore whether they are eligible for an RME NIC reclaim for impacted employees. If making an RME NIC reclaim, and it is successful, employers must ensure they remit any recovered NIC to the impacted employee.
What employers should do next
RME NIC refunds may present a significant opportunity for employers with car‑allowance or vehicle‑heavy workforces, particularly where legacy structures may now qualify for reclassification. By reviewing historic data, strengthening evidence and clarifying go‑forward treatment, employers can proactively mitigate risk and unlock potential savings.
If you operate cash car allowance arrangements, please get in touch with your usual RSM contact to help assess reclaim eligibility and future NIC treatment.