When you’re employed, it’s common to incur various expenses on behalf of your employer. Whether it’s travel costs, accommodation during business trips, or buying necessary supplies, these expenses can add up.
Often, your employer will reimburse you for these costs, but a common question arises: Are reimbursed expenses taxable in the UK?
Generally, reimbursed expenses aren’t taxable in the UK if they are for allowable business expenses. This means your employer covers the cost, and you don’t need to declare it as income.
The definitions
Before we get into the nut and bolts of taxable expenses, let’s take a look at some key terminology:
Allowable business expenses
Allowable business expenses are costs that a business can deduct from its income to reduce its taxable profit. These expenses must be directly related to running the business, such as rent, utilities, employee salaries, office equipment, and travel for work purposes. However, they must be necessary and reasonable, meaning they are typical costs for your type of business. Personal expenses or extravagant costs aren’t allowable.
Reimbursed expenses
Reimbursed expenses are costs that an employee or business owner initially pays out of their own pocket but later gets paid back for by their employer or company. These expenses are usually related to work, like travel, meals, or supplies needed for the job.
For example, if you travel for a business meeting and pay for your hotel and meals, the company might reimburse you, meaning they will give you back the money you spent.
Are reimbursed expenses taxable in the UK?
If the expenses are wholly, exclusively, and necessarily incurred in the performance of your job, they aren’t taxable.
Let’s take a look at a couple of examples:
For travel expenses
Let’s say Sarah works as a sales representative and frequently travels to meet clients. She spends £100 on train tickets for a business trip. Sarah submits her receipts to her employer, who reimburses her £100.
Since the travel expense was incurred exclusively for work purposes, Sarah doesn’t have to pay tax on the £100 reimbursement. It’s tax-free.
For remote working expenses
Imagine John, who has been working from home since the pandemic. His employer agrees to reimburse him £15 per month to cover additional electricity and heating costs. As long as this reimbursement is within the HMRC-approved rate (£6 per week) and is specifically for work-related costs, John won’t be taxed on this amount.
Are there situations where reimbursed expenses are taxable?
Yes, this usually happens when the expenses aren’t solely for work, or if they are seen as providing a personal benefit.
let’s look at a couple examples:
For company car expenses
Alex, who has a company car that he uses for both personal and business trips. His employer reimburses him for the fuel he uses, covering both personal and business mileage. Since part of the reimbursement is for personal use, this portion is taxable as a benefit-in-kind. Alex will have to pay tax on the part of the reimbursement that covers his personal travel.
For non-approved home office equipment
Let’s say Maria buys an expensive chair to use while working from home and submits the cost to her employer. If her employer reimburses her but the chair isn’t considered necessary for her work, or if the amount exceeds the typical cost, the reimbursement could be treated as a taxable benefit. In this case, Maria might have to pay tax on the reimbursement.
How to make sure your reimbursed expenses aren’t taxed
If you want to avoid any surprises at tax time, it’s important to:
- Keep detailed records of all expenses, including receipts and explanations of how they relate to your work.
- Understand HMRC’s guidelines on what constitutes a legitimate, non-taxable expense.
- Communicate with your employer about how expenses will be reimbursed and whether they might be taxable.
Simplify and automate how you manage your expense reimbursements
With Capture Expense, you can easily view, track, and classify your reimbursements, helping you quickly determine which expenses are taxable and which aren’t. Book a personalised demo today.