How to reimburse employees for expenses: process and tax

To reimburse an employee, collect a claim with receipts, have someone else approve it, then repay the exact amount by bank transfer or as a separate line on the payslip. If the expense was for business and the employee could have claimed tax relief on it, the repayment is free of tax and National Insurance and you do not report it to HMRC. Personal costs you repay are taxable and go through payroll.

When is an expense repayment tax-free?

A repayment is tax-free when the employee would get a full tax deduction for the cost. HMRC’s manual page EIM30210 says employers “need only satisfy themselves at the time of making the payment that the expense would be fully deductible”. You do not need to apply to HMRC first.

This exemption, in section 289A of the Income Tax (Earnings and Pensions) Act 2003, has applied since 6 April 2016. It does not cover expenses repaid under a relevant salary sacrifice arrangement.

Typical qualifying costs:

• travel to a temporary workplace, such as a client site
• hotels and meals on business trips
• parking, tolls and train fares for business journeys

Home to a permanent workplace is ordinary commuting and does not qualify.

How to reimburse expenses: a five-step process

A simple process keeps repayments tax-free and gives you evidence if HMRC asks.

1. Set a written policy. Say what staff can claim, the rates and the deadline for claims. Our travel and expenses policy template gives a starting point.
2. Collect a claim with evidence. Ask for the date, purpose, amount and a receipt or VAT invoice for each item. Mileage claims need the date, journey and miles.
3. Approve independently. A manager, not the claimant, checks the claim against the policy. Directors’ own claims should be signed off by another director or the bookkeeper.
4. Repay the exact amount. Pay by bank transfer, or add a separate non-taxable line to the payslip. Do not add it to gross pay.
5. Record and keep the evidence. Post the cost to the right expense code and keep receipts with your payroll records.

If you are VAT registered, you can usually reclaim the VAT on business expenses where you hold a valid VAT receipt. See reclaiming VAT on business expenses.

What rates can you pay without receipts?

You can pay set rates instead of actual costs for some items. These are the main ones for 2026/27.

The 55p car rate applies from 6 April 2026, up from 45p, according to GOV.UK’s mileage rules. Use our mileage calculator for a claim, and see HMRC subsistence rates for the meal conditions.

When you pay benchmark or bespoke rates, HMRC’s EIM30270 expects a checking system. Someone other than the employee should check a random sample of claims regularly, such as monthly or quarterly.

What happens if you pay more or less than the approved rates?

Paying above the approved rate creates a taxable amount. Paying below gives the employee a tax claim.

• If you pay more than 55p a mile, report the excess on a P11D or put it through payroll and deduct tax.
• If you pay less, you report nothing. The employee can claim Mileage Allowance Relief on the gap from HMRC.
• If you pay a flat allowance with no link to actual business costs, treat it as pay and run it through payroll.

Which repayments are taxable?

Repaying a cost that is not wholly a business expense is taxable. Examples include an employee’s home broadband bill, gym membership or ordinary commuting.

You have two ways to handle these:

The GOV.UK deadlines for 2026/27 benefits are 6 July 2027 for P11Ds and the P11D(b), and 22 July 2027 to pay Class 1A (19 July by cheque). A late P11D(b) costs £100 per 50 employees for each month or part month. Our guide to benefits in kind and the P11D covers the forms.

What is changing in 2027 and 2028?

Benefits in kind are moving into payroll. HMRC’s guidance, updated 28 October 2026, says payrolling becomes mandatory for company cars, vans, fuel and medical benefits from 6 April 2027, and for most other benefits from 6 April 2028.

The page does not say how taxable expense repayments will be treated. Until HMRC confirms, keep repaying business expenses outside payroll and keep using the P11D for anything taxable that you do not payroll. Voluntary payrolling registration reopened on 5 November 2026.

What to do now

1. Check your expenses policy uses the 55p mileage rate.
2. Make sure no one approves their own claims.
3. Review any flat allowances; they are probably taxable.
4. Plan for payrolling company cars and medical cover from April 2027.

Frequently asked questions

Do I need to report employee expense repayments to HMRC?

Not if the employee could have claimed a full tax deduction for the cost and it was not under a salary sacrifice arrangement. Taxable repayments go through payroll or on a P11D.

Can I reimburse expenses through payroll?

Yes. Add tax-free repayments as a separate non-taxable line on the payslip, not to gross pay. Taxable repayments are added to gross pay with tax and Class 1 NI deducted.

What is the tax-free mileage rate for employees in 2026/27?

55p a mile for cars and vans for the first 10,000 business miles, and 25p a mile after that, from 6 April 2026.

Do employees need receipts to claim expenses?

For actual costs, yes, keep a receipt or invoice. For HMRC benchmark meal rates and mileage rates you do not need receipts, but you need a record of the journey and a checking system.

Is reimbursing an employee’s home broadband taxable?

Usually yes, because the cost is not wholly for business. Run it through payroll or report it on a P11D.