Employment Allowances & Expenses: What Employers Need to Know

Running a business in the UK is expensive. Between payroll, compliance, and employee support, costs add up quickly. But many employers are unaware that they can legally reduce these costs through government reliefs and tax-deductible expenses.

Two of the most important tools are employment allowances and employee expenses. Both can ease financial pressure on businesses and staff, yet they often cause confusion. This guide explains the differences, what you can claim, how to stay compliant with HMRC and the benefits for your business.

What are employment allowances and employee expenses?

What are employment allowances?

The Employment Allowance is a government scheme that reduces the amount of employer National Insurance (NI) contributions businesses must pay. Every employer who pays Class 1 NI for staff is required to make these contributions, but eligible businesses can cut their annual bill by up to £5,000.

This relief is designed to help small and medium-sized businesses invest more in growth and jobs instead of losing funds to payroll taxes.

What are employee expenses?

Employee expenses are the costs your staff incur while carrying out their role. These might be:

• Travel to temporary workplaces
• Accommodation and meals while away on business
• Tools or equipment needed for the job
• Business use of a personal mobile phone or internet connection
• Costs linked to working from home

Employers can reimburse many of these costs tax-free. If they do not, employees can sometimes claim tax relief for expenses of employment directly from HMRC.

Understanding the key differences

Although the terms sound similar, employment allowances and employee expenses serve very different purposes.

Employment Allowance is a direct saving for the employer. It reduces the amount of employer Class 1 National Insurance (NI) contributions you pay each year. For example, if your business pays £7,000 in NI contributions for staff, the Employment Allowance could reduce this bill by £5,000, leaving only £2,000 to pay. The benefit here goes straight to the business by lowering payroll costs.

Employee Expenses, on the other hand, are costs that employees personally incur while doing their job. These might include train fares to a temporary workplace, hotel stays for overnight business trips, or mileage if they drive their own car for work. Employers can reimburse these costs, usually tax-free, so staff are not left out of pocket. If an employer does not reimburse, employees can claim tax relief for expenses of employment directly from HMRC. The benefit here goes to the employee by reducing their personal tax burden or ensuring they are reimbursed fairly.

A simple way to think about it is:

• Employment Allowance = saving for the employer
• Employee Expenses = relief or reimbursement for the employee

Both mechanisms improve business finances in different ways. Employment Allowance reduces your fixed payroll costs, while reimbursing employee expenses keeps staff motivated, prevents disputes and avoids non-compliance with HMRC rules.

Employers who understand the distinction can benefit twice. By lowering their NI bill through the Employment Allowance and by building goodwill with staff through tax-efficient expense reimbursement.

Why this matters for employers

Getting employment allowances and expenses right brings three key benefits:

1. Lower business costs – The Employment Allowance can save up to £5,000 a year and reimbursed expenses can reduce corporation tax. Together, these savings ease financial pressure.
2. Better employee satisfaction – Covering costs like travel or uniforms shows fairness. Staff who feel supported are more engaged and less likely to leave.
3. Stronger compliance – HMRC has strict rules. Clear processes protect your business from penalties and reduce audit risk.

In short, these claims help businesses save money, retain staff and stay compliant.

Employment Allowance – what it is and how to claim

Who is eligible?

Not every employer can claim. The allowance is designed to support smaller businesses, so eligibility is based on the size of your NI bill. You can usually claim if your Class 1 NI liability was less than £100,000 in the previous tax year. Charities also qualify, but many public sector organisations do not unless they are charities themselves. If your business is part of a group of companies, only one company within the group can benefit from the allowance.

Generally, you can claim if:

• You are a business or charity paying Class 1 NI on employee wages.
• Your NI liability is below £100,000 in the previous tax year.
• You are not a public sector body (unless you are a charity).
• You are not already receiving state aid that restricts the allowance.

How much can employers save?

As of the 2025/26 tax year, eligible employers can claim up to £5,000 per year off their NI bill. This means that a small business with a modest payroll could completely remove its NI liability for the year.

A small employer with an annual NI liability of £3,800 would see their entire bill wiped out for the year. Larger businesses will not see the whole amount disappear, but the £5,000 reduction still provides meaningful relief. Over time, this can free up funds to reinvest in staff training, recruitment, or other areas of growth.

How to claim through payroll software or HMRC

Employers can claim the Employment Allowance through their payroll software or by using HMRC’s Basic PAYE Tools. All you need to do is submit the claim as part of your regular RTI (Real Time Information) submission. Once approved, the savings apply automatically against your NI bill.

For smaller businesses, there are also free payroll options that can help you manage the claim without extra costs.

Changes to employment allowance (April 2025)

From April 2025, HMRC is tightening the process to make sure only eligible employers are claiming. This will involve providing more detailed declarations and confirming that your NI liability falls below the threshold. Employers should check their payroll systems are updated to meet these requirements and ensure any state aid restrictions are considered before making the claim.

Handled correctly, the Employment Allowance is a quick win. It requires minimal administration and can create thousands of pounds in savings that directly reduce the cost of employment.

Tax-deductible employee expenses employers should know about

Understanding which expenses can be reimbursed tax-free or claimed for tax relief is vital for both employers and employees. These costs can quickly add up and handling them correctly ensures staff are not left out of pocket while keeping your business compliant with HMRC rules. Below are the most common categories of allowable expenses.

Flat rate expenses for employees

Certain professions qualify for flat rate expenses for employees, meaning staff do not need to keep receipts for every cost. HMRC sets industry-specific amounts to cover items like uniforms, specialist clothing, or tools.

For example, mechanics can claim a flat rate to cover the cost of buying and maintaining their tools, while nurses can claim a set amount for cleaning their uniforms. Employers can either reimburse these directly or guide employees to claim tax relief themselves. Flat rates simplify the process for both sides and ensure employees are fairly compensated for unavoidable work-related costs.

Mobile phone allowance

Mobile phone use is a common area of confusion. If an employer provides a company-owned mobile phone that is primarily for business use, this is not treated as a taxable benefit. If employees use their personal phones for work, employers can reimburse business-related calls or data charges. However, only the business portion of the bill qualifies for tax exemption.

Because personal and work use can blur, it is advisable for businesses to put a clear telephone, mobile and internet policy in place. This reduces the risk of overclaiming and ensures both employer and employee understand what is covered.

Meal and accommodation allowances

When employees travel for work, employers can cover the cost of meals and accommodation without creating a tax liability. This typically includes:

• Hotel costs for overnight stays.
• Daily meal allowances (sometimes called per diems).
• Subsistence expenses during long business trips.

These costs must be “reasonable” and directly linked to business travel. For instance, paying for dinner during a work trip qualifies, but covering the cost of an employee’s family meals would not.

Homeworking expenses

Remote and hybrid working have made homeworking expenses more relevant than ever. Employers can pay a fixed weekly amount of £6 tax-free to staff working from home to cover increased utility bills. Alternatively, they can reimburse actual additional costs, such as electricity or broadband charges, if backed by receipts.

If employers do not reimburse, employees may be able to claim tax relief directly from HMRC. This has been particularly valuable since COVID-19, when many employees moved to permanent homeworking arrangements.

Travel and mileage expenses

Business travel is one of the most frequently claimed expenses. Employees who use their personal vehicle for work can be reimbursed using HMRC’s Approved Mileage Allowance Payments (AMAP):

• 45p per mile for the first 10,000 miles.
• 25p per mile for every mile thereafter.

These rates cover fuel, wear and tear and general vehicle costs. Journeys to and from a permanent workplace are not allowable, but trips to temporary worksites, client meetings, or training events usually qualify. Public transport fares, parking fees and tolls for business travel can also be reimbursed tax-free.

Reimbursing employee expenses

Employers must handle expense reimbursement carefully to stay compliant. If a payment is not handled correctly, it can become taxable as a Benefit in Kind. To prevent this, reimbursements should always be:

• Directly linked to business activity.
• Supported by receipts or mileage logs.
• Processed through compliant payroll systems.

Using digital payroll software makes it easier to manage expenses accurately, cut down on admin errors and ensure HMRC rules are followed.

HMRC rules and compliance essentials

Getting employment allowances and employee expenses right is not just about saving money, it’s also about staying on the right side of HMRC. The rules are strict and mistakes can lead to penalties or repayments. Employers need to understand what HMRC considers allowable, the risks of mismanagement and when expenses cross the line into taxable benefits.

Allowable expenses for employees: HMRC guidance

For an expense to be allowable, HMRC requires it to be “wholly, exclusively and necessarily” incurred in the performance of the employee’s duties. This means:

• Wholly – the expense must be entirely for work, with no personal benefit. For example, a train ticket to a client meeting is allowable, but a season ticket that also covers personal travel is not.
• Exclusively – the cost must only relate to the job. A business suit does not qualify because it could be worn outside of work, but specialist safety clothing does.
• Necessarily – the expense must be essential to carry out the role, not just convenient. An employee choosing to stay in a luxury hotel instead of a standard business hotel may not qualify for full reimbursement without creating a taxable element.

Employers should keep detailed records of all reimbursed expenses and refer to HMRC employee expenses guidance when in doubt.

Avoiding common pitfalls

Many businesses fall into traps when it comes to expenses and allowances. Some of the most frequent issues include:

• Overclaiming – reimbursing costs that are partly personal, such as paying for a family meal during a business trip.
• Incorrect classifications – treating something as a tax-free expense when it should be reported as a Benefit in Kind. For example, reimbursing home broadband when the employee already had it for personal use.
• Poor record keeping – failing to keep receipts, mileage logs, or written policies can cause HMRC to challenge claims. Even if the expense itself was valid, a lack of evidence can lead to penalties.
• Not updating payroll processes – failing to apply the Employment Allowance correctly, or missing HMRC updates (like the April 2025 changes), can result in underpayments or non-compliance.

When do expenses become reportable benefits?

A key compliance challenge is knowing when an expense tips over into a Benefit in Kind (BIK). A BIK is anything provided to employees that gives them a personal benefit beyond their job role. These must be declared to HMRC, usually via a P11D form or through payrolling benefits in kind.

Examples include:

• A company phone used mainly for personal calls (BIK) versus one used primarily for business (allowable).
• A hotel bill for a work trip (allowable) versus adding spa treatments or family accommodation (partly a BIK).
• Paying a flat-rate homeworking allowance (allowable) versus covering the cost of an entire broadband package already in use for personal reasons (likely a BIK).

If an employer misclassifies expenses, HMRC can demand backdated tax and National Insurance contributions, along with fines and interest. This makes it critical to set clear policies, educate employees about what qualifies and use accurate payroll compliance systems.

Handled properly, expenses and allowances reduce costs and support staff. Handled poorly, they can trigger penalties, strain cash flow and damage employee trust.

How claiming expenses and allowances benefits your business

Employment allowances and employee expenses aren’t just about staying compliant, they can deliver measurable financial and people-focused benefits to your organisation. Businesses that use these reliefs well often find they save money, retain talent and avoid unnecessary HMRC challenges.

Cost savings through NIC and tax relief

The most immediate benefit is cost reduction. The Employment Allowance alone can save up to £5,000 per year on Class 1 National Insurance (NI) contributions. For small businesses, this can wipe out the entire NI bill. For example, a company with an annual NI liability of £3,800 would pay nothing after applying the allowance.

Expense reimbursements also have financial benefits. When handled correctly, many reimbursed expenses are tax-deductible for corporation tax, reducing the amount of profit subject to tax. For instance, reimbursing £10,000 in genuine travel expenses could save a company up to £2,500 in corporation tax (based on a 25% rate). Over time, these savings can fund growth, training, or even salary increases.

Boosting employee satisfaction and retention

Employees who are supported with fair reimbursement are more likely to feel valued and stay with the business. Covering costs like uniforms, meals during travel, or homeworking allowances prevents staff from dipping into their own pocket for work-related expenses.

This fairness builds trust. Staff see the company as transparent and supportive, which has a direct impact on morale. Happier employees are also more engaged, more productive and less likely to seek other opportunities. In industries with high staff turnover, even small gestures like covering mileage or reimbursing subsistence costs can make a noticeable difference.

Staying compliant and audit-ready

Another benefit is risk reduction. HMRC frequently checks businesses for errors in expense reimbursement or Benefit in Kind reporting. Employers with strong systems in place — supported by digital payroll compliance tools — can demonstrate that their claims are accurate and legitimate.

Good compliance practices mean:

• You can provide receipts, mileage logs and policies instantly if HMRC requests them.
• You avoid penalties, backdated tax, or reputational damage.
• You spend less time resolving disputes and more time focusing on growth.

Ultimately, effective use of expenses and allowances protects your finances, strengthens employee relationships and keeps your business running smoothly.

Types of employee expenses and allowances

The following table summarises the most common types of employee expenses and allowances, how HMRC treats them and the benefits for employers.: 

Make payroll work harder for your business with Employment Hero

Employment allowances and employee expenses can seem complex, but the savings and compliance benefits are worth the effort. By understanding what you can claim and making sure your processes are HMRC-compliant, you can reduce your NI bill, lower corporation tax and support your employees more effectively.

The easiest way to manage this is with the right tools. With Employment Hero’s payroll software, you can automate claims, process reimbursements correctly and stay compliant without adding to your admin load. If you’re not ready to commit, you can even try our free payroll option to see how simple it can be.

Don’t leave money on the table. Review your current approach to expenses and allowances today and make sure your business is taking advantage of every relief available.