Employee allowances

As an employer, you have the option to offer your employees additional payments known as “Employee allowances” in addition to their regular salary. These allowances are provided to cover expenses related to accommodation, meals, clothing, and other related costs, and are subject to taxation through PAYE.

Employee allowances refer to the extra payments made to staff that are not included in their regular wages or salary, such as accommodation or travel expenses. The taxation of these allowances depends on their specific circumstances, with some being subject to tax while others are tax-free.

The ‘Other Payments’ section of the Inland Revenue Employer’s Guide provides detailed information on employee allowances, including case studies and calculations.

Download the Employers Guide — Inland Revenue

For small business owners, it is crucial to understand which employee allowances must be taxed through the PAYE system. While some allowances are tax-free, this post provides examples to help clarify which allowances fall under this category.

In most cases, providing accommodation or an accommodation allowance to an employee is subject to taxation through PAYE. However, it’s worth noting that not all accommodation allowances are taxable.

Tax-free accommodation allowances may include payments made to employees who are:

• Attending a work-related meeting, conference or training course that requires an overnight stay
• Working in a location that is difficult to commute to on a daily basis, such as during a secondment

Additionally, certain tax exemptions for accommodation allowances apply to Canterbury earthquake reconstruction projects.

Accommodation allowances — Inland Revenue

Employee allowances can be provided to cover expenses related to meals and clothing required as part of their job, and are generally tax-exempt. Some common examples of tax-free meal and clothing allowances include:

• payments made to cover meals for employees working off-site
• payments for clothing required for work purposes, such as uniforms or protective gear.

Meal and clothing allowances — Inland Revenue

Fringe benefits tax (FBT) does not apply to employee allowances.

When employers provide perks or benefits to their staff, such as a gym membership or a work vehicle available for personal use, they are responsible for paying the Fringe Benefits Tax (FBT), not the employees.

Employees may be eligible for travel payments for travel between their home and work, which are typically subject to taxation via the PAYE system. However, the following circumstances may result in tax-free travel payments for employees:

• Working outside of their normal hours, such as overtime, shift work, or weekend work
• Transporting work-related tools or equipment that cannot be easily carried on public transportation
• Travelling to perform a necessary task for the business
• Temporarily working at a different location
• No adequate public transportation system is available to serve their workplace.

Travel allowances — Inland Revenue

Benefit allowances are supplementary payments made to employees in addition to their salary or wages. These allowances can include:

• Food allowances, such as payments to offset the cost of meals provided at a workplace cafe or canteen
• Clothing allowances, such as payments to purchase professional attire (not including uniforms)
• Free or reduced-cost accommodations, such as a farm worker paying below-market rent for a farm cottage.

These allowances are subject to taxation, as they are paid as part of the employee’s wages, and are therefore subject to PAYE deductions.

Paying tax on non-exempt benefit allowances — Inland Revenue

Reimbursement allowances are payments made to employees to cover any unforeseen expenses they incur while on the job, such as meals or travel costs incurred while working away from their usual place of work.

If an employee uses their own funds to cover a work-related expense, you are responsible for reimbursing them for the cost. They can either provide receipts for the expenses or you can make a reasonable estimate of the amount to be reimbursed.

Reimbursements are typically paid to employees as part of their regular pay and are added to their net salary after PAYE deductions have been made. Reimbursement allowances are generally tax-free unless the amount paid exceeds the employment-related expense. In such cases, the difference between the employment-related cost and the amount paid is subject to PAYE.

Reimbursing allowances — Inland Revenue

As a GST-registered business, you are eligible to claim GST credits on reimbursements made to employees for work-related expenses. However, you cannot claim GST on allowances paid to employees that are not reimbursed for employment-related expenses or those paid for their personal expenses.

Maintaining accurate records of employee allowance payments, whether taxable or tax-free, is crucial. You must keep all necessary documentation to verify that your payments meet the required tax-exemption criteria.

The same record-keeping rules that apply to other business transactions also apply to employee allowances. You are required to retain these records for a period of seven years and maintain them in the English language unless the Inland Revenue grants approval for the use of another language.

Personnel files and record-keeping

If you need help, contact us.