Are expenses reimbursed to employees exempt from PAYE & NI?

Expenses which to any degree are not 'wholly & exclusively' for business, are entirely taxable e.g. payments for home to work travel. Splitting between taxable and exempt is not required; if an employee disagrees, they can claim tax relief directly from HMRC.

It is down to the employers to decide if expenses are exempt or taxable. If exempt, you can simply pay expenses to the employee, otherwise they count as earnings and are subject  PAYE and NI deductions. WARNING: HMRC say they will collect the unpaid tax and NI from the employer if they make the wrong decision.

For mixed expense payments (for example, home telephone rental), if you can clearly identify the allowable expense amount at the time of payment, only the non-exempt amount will need to be treated as earnings and subject to tax and Class 1 NICs through payroll. 

If the non-exempt amount is not clearly identifiable at the time of payment you should treat the full amount as earnings and deduct tax and Class 1 NICs accordingly. Your employees can then claim tax relief for the exempt amount related to business use in the normal manner.

Expense payments are exempt where the following 2 conditions are met:

  • The employer has a system for checking that the expenses claimed were actually incurred and were a genuine business expense.
  • The employer did not know or suspect, nor could reasonably be expected to know or suspect, that the employee either never incurred the expense or that the 'wholly & exclusively' rule wasn't met.

The latter therefore provides some protection for the employer. It is always advisable to check with HMRC's guidance for which expenses you are unsure about and keep a record of why you came to the decision you did. If you then wrongly exempt an expense you are protected from liability if it was reasonable for you to believe it was exempt.​

Contact us

Maple House
5 The Maples
BS49 4FS
info@astrum.accountantsTel: 01275 277369 | 01934 235007 | 0117 2140369 


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