Expenses and benefits: cash sum payments to employees

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1. Overview

As an employer providing business or private expenses for your employees, you have certain tax, National Insurance and reporting obligations.

There are separate rules for individual benefits you provide to your employees. You need to follow specific reporting and payment rules for different items, including travel, meals and accommodation.

What’s included

The rules on cash sum payments for business expenses cover:

  • cash sums you provide to meet the costs of your employees’ expenses
  • expenses they’ve paid for themselves that you reimburse
  • ‘scale rate payments’ you pay at a level agreed with HM Revenue and Customs (HMRC)
  • ‘round sum allowances’, which you give to an employee regardless of how they spend them

Payments for private expenses count as earnings.

2. Rules for business expenses

In general, something only counts as a business expense if your employee needs it to do their job. You do not have to deduct or pay tax and National Insurance on qualifying business expenses, but you need to make sure that they meet all of HM Revenue and Customs’ (HMRC) criteria for:

Business travel

Costs relating to business travel also count as business expenses, unless the travel is in the employee’s own vehicle.

For more details, see the guides on:

What to report and pay

You must report the cost of the expenses on form P11D. You do not need to deduct or pay any tax or National Insurance.

Some business expenses are covered by exemptions (which have replaced dispensations). This means you will not have to include them in your end-of-year reports.

3. Rules for private expenses

Private expenses are anything that does not count as a business expense, for example the cost of any travel that is not necessary for your employee to do their job.

If you cover the costs of private expenses, this counts as earnings. You’ll need to:

  • add the amount to your employee’s other earnings
  • deduct and pay Pay As You Earn (PAYE) tax and Class 1 National Insurance through payroll

4. Scale rate payments

If you provide your employees with a set amount of cash to pay for some common business expenses like travel and meals, these are known as ‘scale rate payments’.

As long as your employee has actually spent the scale rate payment on business expenses, you will not need to check every single receipt - it’s fine to just check a sample.

You can set up a scale rate payment by either:

HMRC also provides benchmark rates for employees travelling outside the UK.

What to report and pay

You must report the scale rate payments on form P11D unless they are exempt or no more than the agreed scale rate or benchmarked scale rate. This means you do not have to include them in your end-of-year reports.

You do not need to deduct or pay any tax or National Insurance when reporting scale rate payments.

5. Round sum allowances

If you provide a set amount of cash for employees regardless of how they spend it, this is known as a ‘round sum allowance’.

This counts as earnings, so you’ll need to:

  • add the full amount of the round sum allowance to the employee’s other earnings when deducting and paying Pay As You Earn (PAYE) tax through payroll
  • add the amount of the round sum allowance - minus any specific business expenses covered by it - to the employee’s other earnings when deducting and paying Class 1 National Insurance through payroll

6. Technical guidance

The following guides contain more detailed information: