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Employers can also pay mileage allowance payments free of National Insurance contributions as long as the amount paid does not exceed the approved amount. The mileage allowance scheme for National Insurance purposes is similar to that applying for tax purposes (see Tip 7), but with one key difference – the rate for cars and vans is 45p per mile regardless of the number of business miles driven.
This is because, unlike tax, National Insurance contributions are computed separately for each earnings period rather than cumulatively.
NIC-free mileage allowance payments example
Jessica uses her car for business and is paid a mileage allowance of 45p per mile. She drives 15,000 miles in the tax year.
No NIC liability arises in respect of the allowance as it is paid at the approved rate for NIC purposes of 45p per mile. She receives an allowance of £6,750.
However, a tax liability will arise as the allowance paid exceeds the approved amount for tax purposes (see Tip 7).
The approved amount is £5,750 ((10,000 miles @ 45p per mile) + (5,000 miles @ 25p per mile)). The excess of the allowance paid over the approved amount (£1,000) is liable to tax. However, because of the different rules applying for National Insurance purposes, there is no National Insurance to pay.
This is an extract from our book 101 Employer and Employee Tax Tips – read more here.