Skip to content
× FreshBooks App Logo
Official App
Free - Google Play
Get it
You're currently on our UK site. Select your regional site here:
4 Min. Read

What Is Expense Reimbursement? 3 Best Reimbursement Methods

What Is Expense Reimbursement? 3 Best Reimbursement Methods

Expense reimbursement is a standard expectation for a UK business owner. Not only for employees but also for yourself! As the director of the company, you’ll incur certain out-of-pocket expenses for the business that you can offset to the company accounts.

This guide will explain how reimbursement works, why you should do it and the best methods.

Here’s What We’ll Cover:

What Is Expense Reimbursement?

3 Ways To Reimburse Employees

Key Takeaways

What Is Expense Reimbursement?

Expense reimbursement refers to giving full or partial repayment to employees for business-related expenses. The most common types of expenses that employers reimburse are:

  • Transportation expenses from domestic or international travel. Business travel expenses exclude work to home journeys. A commute doesn’t count!
  • Mileage and fuel expenses. You use the HMRC standard mileage rate guidelines to calculate these.
  • Business meal expenses
  • Company car expenses
  • Petty cash expenses

The HMRC has very strict requirements for reimbursement. These qualify as reimbursable expenses only if:

  • They were necessary to complete a business activity
  • They were paid in full by the employees who are claiming reimbursement for them
  • You have itemised receipts from the employees to show evidence of the expense
  • The expenses were only related to work activities. For example, if an employee takes a business trip to Berlin for 3 days and decides to stay an extra 3 days as a holiday, they can’t claim expenses for the full trip.

If your employees claim for expenses outside of these very strict guidelines, the HMRC will view it as income and tax them extra. Therefore it’s within everyone’s best interest to be as transparent as possible.

You can receive tax deductions on expenses that you reimburse your employees for.

3 Ways To Reimburse Employees

Expense reimbursement methods in the UK are somewhat limited. To get those juicy tax credits, you need to declare them on the employee’s P11D form at the end of the tax year. That said, there are a couple of ways of managing expenses that you can choose.

Business Pre-Paid Expense Cards

Pre-paid expense cards are a great way to somewhat cut out the reimbursement process entirely. By having a pre-paid card, you can control your employee’s spending much more easily. Different employees can have different limits which are better for your accounting budget.

Expense tracking is way easier to do too. You simply have to look at the card statements to have an accurate account of what’s happening. You save a lot of paperwork and rigmarole with accurate records from the credit card company.

The downside is the expense cards can be costly for a small business. Particularly if you have more than one.

Reimbursement Through Payroll

To reimburse your employees through payroll, you need to register to do so on the HMRC website.

It allows you to directly pay tax or receive deductions on your employee’s pay quickly and easily.

You’ll need to make sure that your employees are diligent about their expense reporting to you to do this.

The best way is always with intuitive technology. Our expense reporting system is so easy to use. It’s simple for employees to record their expenses and attach receipts to the record on your ledger.

Because our system is completely integrative, it’ll also calculate any tax deductions you’re owed from the HMRC. We are an accredited online tax software for the UK too. So you can file your expense report and tax return right from our software.

To learn more about how expense reporting works for your business, head to this link.

Per Diems

No, we’re not speaking Latin here. Well… we are. But in this case per diems are a very specific expense term in UK business accounting. A per diem is a set rate by the government for business travel. You can legally reimburse them the per diem rate that the HMRC suggests. This is instead of reimbursing your employee the exact penny amount for their travel expenses.

Key Takeaways

Business expense reimbursements are important to do and to track. How you design your expense policy also involves your expense reimbursement process. Make it clear to all employees how they can make an expense claim and what constitutes an allowable business expense under the eyes of the law.

For more business guides like this one, head to our resource hub!