These questions are being answered by Learn HR, a market leader in the provision of HR and payroll training and nationally-recognised professional qualifications.
Q: How should essential user allowances that are paid to employees who use their own cars for business purposes be reported?
A: Payments of mileage allowances are only reported for tax purposes on form P9D or P11D if the total of all mileage allowance payments made in the year exceed the statutory maximum for the vehicle (i.e. car, van, motorcycle or bicycle).
If more than the maximum is paid, only the excess is reported. A similar procedure applies for Class 1 NICs, but the comparison between the payments made and the maximum must be made for each earnings period.
The maximum amount that may be paid without any tax liability is calculated, in the case of a car or a van, by multiplying the true business mileage for the tax year by 40p for the first 10,000 miles, and by 25p for any mileage over 10,000 miles.
The question here is how essential user allowances should be handled in this context. It has been the practice of some employers over many years, particularly local authorities and housing associations, to add such payments to gross pay in each pay period and deduct PAYE tax and NICs accordingly.
This is not the correct way of taxing essential user allowances and, if they are taxed in this way, it raises complications when completing P9Ds or P11Ds and can mean that employees pay more tax and employers pay more NICs during the year than they should.
The P11D WS6 Working Sheet refers simply to the total “mileage allowance payments” made during the tax year. This term is not defined and there is nothing on the P11D itself, in the P11D Guide or in the 480 booklet that reminds employers that essential user allowances should be included in the total mileage allowance payments. All is made clear elsewhere, however.
The IR124 booklet, written for employees, refers to “mileage allowances that are based on a set rate per mile, regular lump sum payments and one-off payments which are paid in recognition of the use of your vehicle for business travel.” A similar description is found in the 490 Employee Travel booklet.
The intention, therefore, of the new mileage allowance rules, is that an employee’s tax liability should only be determined at the year-end, hence the new Working Sheet 6. All the mileage payments made to the employee during the tax year, including essential user allowances, should be totalled and, if the total is less than the statutory maximum for the year, there is nothing to report on form P11D at all. If the total payments for the year exceed the statutory maximum, only the excess is reported.
All is not lost if essential user allowances have been taxed through the payroll. In section 1 of the WS6 Working Sheet (Box B), the amount on which tax has been paid is entered as a “minus” amount, thereby reducing the total allowances for the year before they are compared with the statutory maximum amount.
However, this may serve to demonstrate that the employee has overpaid tax on the essential user allowances taxed through the payroll, illustrating that the tax liability on all mileage allowance payments should only be determined at the year end.
Similarly, if all of the essential user allowances paid during the tax year have been subjected to Class 1 NICs, it may well be that the employer, and possibly the employee, have overpaid NICs. The procedures that should be followed in each earnings period are similar to but a little more complex than the tax calculation. Examples of the calculations in various situations are shown in Chapter 6 of the 490 booklet.
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