Tax implications of reimbursing employees’ expenses

Employees often incur expenses in doing their job and they may be able to claim these back from their employer through the expenses system. Where an employer reimburses expenses, there may be tax implications to consider.

Exemption for paid and reimbursed expenses

A tax exemption applies to certain paid and reimbursed expenses. It is available if the expenses which are paid or reimbursed by the employer would be fully deductible from an employee’s earnings had the employee met the cost themselves.

Employees are allowed a deduction for expenses which are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. The tax legislation also allows a deduction for a number of specific expenses, such as certain travel expenses and fees and subscriptions paid to bodies approved by HMRC.

As long as this test is met, the exemption applies regardless of whether the employer meets the cost at the outset or the employee pays initially and is reimbursed by the employer. For example, if an employee is required to attend a meeting at a client’s office, the employee would be able to deduct the associated travelling costs if they met them themselves. As this test is met, if the employer pays the cost, for example by purchasing a train ticket for the employee, or reimburses the employee’s travel costs, the exemption would apply and there would be no tax consequences in either case.

However, if the test is not met, and the employer paid or reimbursed the employee’s expenses, the amount paid or reimbursed would be taxable. An example of this would be where an employer reimbursed the cost of the employee’s home to work travel (which is not tax deductible).

Forthcoming changes

There are some anomalies in the tax legislation that mean no tax charge arises where the employer provides an employee with a benefit, but a tax charge will arise if the employee provides the same thing and is reimbursed by their employer. For example, an employer can provide an employee with an eye test and corrective appliances without triggering a tax charge, but if an employee books and pays for an eye test and is reimbursed by their employer, the amount reimbursed is taxable as the employee is not entitled to a deduction for the cost of an eye test.

To counter this, new exemptions are to be introduced which will level the playing field in respect of certain benefits, meaning that the tax outcome is the same regardless of whether the employer provides the benefit or reimburses the employee for the costs.

From 6 April 2026 exemptions will be introduced to ensure that where an employer pays for or reimburses an employee for the cost of eye tests, flu vaccines or homeworking equipment no tax charge will arise. This will align the tax position with that where these benefits are provided directly by the employer.

Partner note: ITEPA 2003, s. 289A; www.gov.uk/government/publications/the-expansion-of-workplace-benefits-relief.

Disclaimer

This article is not intended to be tax advice. Each person's tax circumstances are different; therefore, we recommend that you contact us for personalized tax advice. Sam Niranjan & Co., or Sivasambu Candesamy Niranjan, will not accept any responsibility whatsoever if you make any loss as a result of relying on this article.