A reimbursing allowance paid by an employer to an employee is tax free if it compensates the employee for employment-related expenses.
If the allowance is not so much reimbursing an employee for work-related costs, but more in the nature of a monetary benefit – such as a general clothing allowance or an allowance for working in dangerous or dirty conditions – then the allowance is not tax-free.Inland Revenue regards it as monetary remuneration and subject to PAYE.
Private vehicles used for work-related purposes
Inland Revenue allows an employer to reimburse employees – including shareholder-employees – for using their private vehicles for work-related purposes.
The employer can choose to:
- reimburse actual costs incurred by the employee, or
- use the Inland Revenue kilometre rate, or
- use other published mileage rates, as long as they represent a reasonable estimate. For example, the AA makes mileage rates available free to members and at a cost to non-members. To obtain AA rates call 0800 500 333
- reimburse costs based on a reasonable estimate of the costs likely to be incurred by the employee or a group of employees
Inland Revenue will accept the standard kilometre rate as being a reasonable estimate of the costs likely to be incurred by an employee. An employer may choose to use the applicable vehicle type rate per kilometre shown for reimbursing employees:
2017/2018 Kilometre Rates
|Vehicle type||Tier One rate: First 14,000 kms||Tier Two rate: After 14,000 kms|
|Petrol or Diesel||76 cents/km||26 cents/km|
|Petrol Hybrid||76 cents/km||18 cents/km|
|Electric||76 cents/km||9 cents/km|
Where an employee has kept a logbook or other evidence for work-related use, the 76 cents/km rate can be applied to the first 14,000 km. If evidence has not been kept the rate of 76 cents/km will be limited to the first 3,500km (25% of 14,000).
The rate applies irrespective of engine size. It does not apply to motorcycles.
Note that for the 2018/19 income year, employers may reimburse employees using the new Tier One Rate of 76 cents per kilometre from 4 July 2018 (being the date of an Operational Statement released by Inland Revenue). However, the two tiered rates as set out above must be used for the 2019/20 and subsequent income years.
Travel for work-related purposes
Any reimbursing allowance for travel must meet the following criteria:
- the transport costs being reimbursed must be additional to costs incurred in travelling between the employee’s home and place of work
- the costs must be attributable to one or more of the following work-related factors:
- time of work:the time of day or days of the week the employee is required to work, cause the employee to incur additional transport costs
- For example: A commercial cleaner travels by bus to start work at 8 pm and finishes at midnight, by which time there is no bus available to travel home. The employee travels home by taxi.
- carrying work equipment: the employee is required to bring work equipment to work, which requires him or her to use a particular means of transport
- For example: The Company van/truck is double-booked andthe employee uses their own van/truck to complete business deliveries.
- temporary change in work site: there is a temporary change from the normal place of work of an employee in relation to the same employer
- For example: An employee is assigned to work at another branch across town for eight months. He or she incurs the cost of additional bus trips for that period.
- the absence of a public passenger transport system
- If you pay your employeemore than the amount they incurred as a cost on your behalf, then that excessis treated as monetary remuneration and is subject to PAYE.
If you pay your employee more than the amount they incurred as a cost on your behalf, then that excess is treated as monetary remuneration and is subject to PAYE.
Instead of reimbursing actual expenditure incurred by an employee for any other work-related purposes,an allowance may be paid to the employee based on a fair and reasonable estimate of work-related expenditure likely to be incurred.
Some methods which can be used to show that the payment is fair and reasonable include:
- carrying out a survey of expenditure incurred by employees
- adopting an industry average agreed upon by Inland Revenue and representatives of that industry; or
- following a public statement issued by Inland Revenue on that class of allowance
Last reviewed: 14 August 2018