Payroll & Business Expenses: What Employers Need to Get Right
What are Business Expenses?
Business expenses are costs employees incur while performing their duties, which the employer agrees to repay. Common examples include:
* Travel, subsistence and accommodation when working away from base
* Equipment, tools, uniforms or clothing required for the job
* Phone or internet costs when required for work
For an expense to be allowable (not treated as taxable income or a benefit), it must be wholly, exclusively and necessarily incurred in the performance of the job. If there is any private element, only the business part can be claimed.
Payroll vs Separate Expense Reimbursement
A key question is: should business expenses be paid through payroll or separately?
Benefits of separate expense reimbursement
* Simpler tax treatment for qualifying expenses — they can be repaid without income tax or National Insurance deductions.
* Clearer record-keeping — keeping expenses separate from salary makes it easier to distinguish costs of doing business from remuneration.
Risks of putting expenses through payroll
* If paid via payroll, expenses risk being treated like income, potentially subject to tax and NICs.
* Approvals and timing can be slower, particularly if expense claims miss payroll cut-off dates.
* Mixing expenses and salary complicates reconciliation, documentation, and audits
HMRC Requirements
Employers must follow specific HMRC rules when reimbursing or treating expenses and benefits:
- Qualifying expenses exemption: These can be paid or reimbursed without deductions if they meet HMRC criteria.
- Reporting requirements: Some expenses or benefits must be reported on P11D if not processed through payroll.
- Non-taxable vs taxable benefits: Benefits such as company cars or health insurance are taxable, with Class 1A NICs often due.
Evidence and records: Receipts, mileage logs, dates, and purposes are essential — without evidence, HMRC may reject claims.