Your employees might pay for work-related expenses with their own money. These can include travel expenses, professional fees, buying equipment and materials, and so on.
As the employer, you are responsible to reimburse your employees for any work expense that they have incurred while working for you.
Managing employment expenses may be challenging, and if you make a mistake, you may end up losing a significant amount of money.
In this guide, we'll explain what employee expenses are, what expenses employees may claim tax relief for, and how to effectively manage expenses.
What are employee expenses?
Employee expenses are expenses incurred by your employee while performing their duties.
An employer can reimburse their employees when:
- The expenses are incurred entirely, and necessarily in the performance of their duties.
- The receipts for the expenses are available.
What can employees claim expenses for?
In order for the employer to be able to pay the employee back, the expenses should be qualified as "business expenses" or "business travel".
HM Revenue and Customs have specified some specific rules for employment expenses to qualify for tax relief:
- The expense should be incurred by whoever was doing the job.
- The business expense was necessary for them to do the job.
- The expense was incurred in the performance of their duties.
- The expenses were incurred and paid.
- The expense was wholly and exclusively for their job.
Each of the five conditions mentioned above are explained in more detail below:
The expense should be incurred by whoever was doing the job
HM Revenue and Customs look at the requirements of the job itself rather than the employee's requirements as an individual.
They use the example of an employee working in a chemical factory who's given special clothing by their employer. The employee decides to buy their own instead because they find the employer's overalls uncomfortable.
In this case, because the employee is already provided with regulation protective clothing, they would have to pay additional tax on any extra payment provided by the employer.
The business expense was necessary for them to do the job
As a general rule stated by HMRC, it's the nature of the expense that would be necessary, not the amount.
For example, assume your office space is in Manchester and your employee has to travel to London for a business meeting. They can claim the cost of the journey back from you regardless of the mode of transportation.
If they use their own car for business travel, you can pay tax-free mileage payments up to the approved rates.
In the case of employees using their own car, van, motorbikes and bicycles for job purposes, the approved mileage allowance payment rates are:
First 10,000 business miles in the tax year:
- Cars and vans: 45p
- Motorbikes: 24p
- Bicycles: 20p
Each business mile over 10,000 miles in the year:
- Cars and vans: 25p
- Motorbikes: 24p
- Bicycles: 20p
The expense was incurred in the performance of their duties
HMRC gives the example of a salesman whose company does major export to France.
He recognises that he will be unable to do his job successfully until he improves his knowledge of the French language.
He takes part in a night school class one evening each week. He requests a tuition reduction for the course. The cost of his classes doesn't qualify as a business cost.
Even though they are relevant to his employment, he doesn't necessarily need to be fluent in French to perform his job.
The expense was incurred and paid
If the total costs you've incurred in a tax year exceed your wages, then you can't claim tax relief.
For example, if you're a company director with an income of £6,000 a year, and your costs amount to £8,000 but you haven't paid yourself anything back for those costs, then your taxable income is zero.
The expense was wholly and exclusively for their job
For non-travel expenses, if the expenditure has a dual purpose, business and non-business, then unless you can work out part of it that was just for business, you can't claim any of it.
The classic example here is ordinary clothing, sometimes worn for work in the office.
For example, your employee buys a plain grey skirt to wear to the office. Because she could also wear that skirt for dinner out with her husband, she can't ask you to pay for the cost of her skirt. She could only claim it as an expense if it was a business requirement.
The following are some of the allowable expenses that employees are able to claim and should be reimbursed for:
- Business travel expenses, such as the cost of a train ticket or use of their own vehicle.
- Temporary accommodation.
- Professional fees and subscriptions, such as the cost of a training course.
- Work uniform.
- Office equipment.
- Subsistence costs, such as meals and drinks.
Can employees claim tax relief?
Yes, they may be able to claim tax relief if the employer doesn’t reimburse them when they incur expenses.
Their employment income is subject to tax relief by deduction of the number of costs. Based on rules by HMRC, the employee can claim a tax deduction on the following:
- Expenses they have paid themselves without any reimbursement.
- Expenses you have reimbursed but were taxed on the reimbursement.
If the employer pays for or reimburses their employees, the amount reimbursed is not taxable and employees can't claim tax relief in the same manner. This is because they haven't personally paid for any costs from their income.
How do employees claim tax relief?
There are different ways for employees to claim tax relief on their employment income. An expense claim for deduction can be made through one of the following options:
- HMRC’s online service.
- Posting a completed and signed form to HMRC (P87 form).
- Calling HMRC.
- Via the self-assessment tax return system.
They can choose one of the above options based on personal reasons and circumstances.
What is a flat rate expenses allowance?
Flat rate expenses are a set amount of money that employees can claim tax relief on for a certain cost that they may incur.
This can be used if they incur costs related to cleaning work uniforms and specialist clothing. Also, it can be used to cover the cost of repairing specialised tools and equipment.
Employees benefit from the flat rate system since they do not have to keep track of exact amounts spent when making claims for a deduction.
The lowest amount of allowance they can claim is worth £60 per tax year. However, many trades and industries have higher amounts for flat rate expenses.
Tax relief for employees working from home
Your employees may be able to claim tax relief for additional household costs if they have to work at home for all or part of the week. This might be due to the nature of the job requiring them to work remotely, or because you, the employer, don't have an office.
Claims are not acceptable if they choose to work from home. This includes if:
- The employment contract lets them work from home some or all of the time.
- They work from home because of COVID-19.
- The employer has an office but they can't go there sometimes because it's full.
When working from home, tax relief can only be claimed for reasonable things related to their job. This can be the cost of business phone calls, gas and electricity for their work area.
Things such as rent or the cost of broadband access that they use for both private and job purposes can't be claimed.
How much can be claimed?
They can either claim tax relief on:
- £6 a week from 6 April 2020 (for previous tax years the rate is £4 a week) - in this case, they aren't required to keep evidence of an extra cost.
- The exact amount of extra costs incurred above the weekly amount - in this case, they're required to keep evidence such as a receipt, bill, or contract.
They'll get tax relief based on the rate at which they pay tax. They'll usually get tax relief through a change to their tax code.
For example, if your employee pays the 20% basic rate of tax and claims tax relief on £6 a week, they will get £1.20 per week in tax relief (20% of £6).
How to keep track of business expenses
Tracking business expenses might be tiring and stressful, but it's critical for an employer to understand their company's financial health.
If you're self-employed or own a small company, keeping track of expenses will help you decide if you can grow your business.
There are several ways to keep track of employment expenses. The following are some effective approaches.
- Open a business bank account for employment expenses.
- Organise the receipts.
- Use software to categorise the expenses incurred.
- Stay updated on the latest rules and guidelines on tax and employment.
Get expert advice on employee expenses
Managing job-related costs incurred by employees may be challenging for an employer in some circumstances. They can claim tax relief if you don't reimburse them a reasonable amount on job-related payments.
If you don't manage the reimbursement properly, you can end up suffering a significant financial loss.
You don't necessarily have to handle things all by yourself. We can support you in challenging situations by giving you advice about the rules regarding reimbursement of costs and deductible expenses.
Peninsula offers 24/7 HR advice which is available 365 days a year. Want to find out more? We take care of everything when you work with our HR experts. Contact us on 0800 051 3687 and book a free consultation with one of our HR consultants.