Staff Expenses and Subsistence: The Complete HMRC Guide for Limited Companies

A limited company can reimburse staff expenses tax-free only where the cost is incurred wholly, exclusively and necessarily in the performance of the employee's duties; pay above HMRC's approved rates, document too little, or use the wrong reporting route and an innocent travel claim becomes a taxable benefit with a P11D entry and a Class 1A National Insurance bill. Getting the staff expenses HMRC 2026 rules right protects both the company and its people, and it keeps legitimate costs fully deductible against corporation tax.

This guide sets out how a limited company should handle the most common categories of employee spending: business travel, subsistence, homeworking, and the question of whether a cost belongs on a P11D or runs through the payroll. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps directors build expenses policies that stay inside HMRC's rules.

Key Takeaways

• An employee expense is only tax-free where it is incurred wholly, exclusively and necessarily in the performance of duties, a stricter test than the one for the self-employed.
• HMRC's approved mileage rate is 55p per mile for the first 10,000 business miles in the tax year, then 25p per mile thereafter.
• An employee driving 12,000 business miles in 2026/27 can be reimbursed £6,000 tax-free (10,000 at 55p plus 2,000 at 25p).
• HMRC's benchmark subsistence scale rates are £5 (5+ hours away), £10 (10+ hours), and £25 (15+ hours, where the journey continues beyond 8pm).
• A company can pay a tax-free homeworking allowance of £6 per week (£312 per year) towards additional household costs, with no evidence required.
• Ordinary commuting between home and a permanent workplace is never an allowable expense.

What Is the Core Test for Tax-Free Staff Expenses?

For an employee expense to be free of tax, it must be incurred wholly, exclusively and necessarily in the performance of their duties. This is a stricter standard than the one applied to the self-employed, and the word "necessarily" matters: the cost must be one that any holder of that role would have to incur, not simply one the employee chose to.

Where a reimbursement meets this test, it is not taxable on the employee and is deductible for the company. Where it fails, the payment becomes employee business expenses tax to account for, either as a benefit in kind or, in some cases, as additional earnings subject to PAYE and National Insurance. Most ordinary running costs, such as travel to a temporary workplace, qualify comfortably. Problems arise at the edges: ordinary commuting, dual-purpose spending, and anything with a personal benefit attached.

Keeping receipts and a short note of the business purpose for each claim is the single most effective safeguard. HMRC guidance expects records to be retained, and a tidy expenses policy makes any future enquiry far easier to handle.

How Are Business Travel and Mileage Reimbursed?

Travel costs are deductible where the journey is to a temporary workplace or is undertaken in the performance of duties, while ordinary commuting between home and a permanent workplace is never allowable, however inconvenient.

Where an employee uses their own car for business travel, the company can reimburse using HMRC's approved mileage allowance payments. For cars and vans the rate is 55p per mile for the first 10,000 business miles in the tax year, then 25p per mile thereafter. Payments at or below these rates are tax-free and need not be reported.

Consider an employee who drives 12,000 business miles in the 2026/27 tax year. The tax-free reimbursement is 10,000 miles at 55p (£5,500) plus 2,000 miles at 25p (£500), giving £6,000. If the company instead paid a flat 55p across all 12,000 miles, that would be £6,600, and the extra £600 would be taxable as employee business expenses tax. Rail, air and public transport fares for business journeys are reimbursable in full where supported by receipts.

How Do Subsistence Allowances Work?

Subsistence covers reasonable food and drink costs incurred when an employee travels for a qualifying business journey, and a company can either reimburse actual receipted spending or use HMRC's benchmark scale rates without keeping every receipt. The cost must attach to a qualifying business journey, not to ordinary day-to-day eating.

The benchmark scale rates a subsistence allowance UK employers can use are £5 where the employee is away for at least five hours, £10 for at least ten hours, and £25 for fifteen hours or more (where the journey continues beyond 8pm). To use the benchmark rates, the company must have a checking system confirming the employee was genuinely travelling and incurred a cost.

For example, a project manager attending a client site from 8am to 7pm, an eleven-hour absence, could receive the £10 benchmark rate tax-free, with no receipt required, provided the company operates the necessary checks. Pay above the scale rate, or without a qualifying journey, and the excess becomes taxable. A clear subsistence allowance UK policy avoids disputes and keeps the treatment consistent across the team.

What Homeworking Allowance Can a Company Pay?

Where an employee works from home under a homeworking arrangement, the company can pay a tax-free allowance of £6 per week (£312 per year) towards additional household costs such as heat and light, with no evidence required. Higher amounts can be paid tax-free but must be justified by actual additional costs, which is harder to evidence and rarely worth the administrative effort.

This applies to directors too, provided there is a genuine homeworking requirement rather than a matter of personal choice. A director who runs the company's administration from a home office can draw the £6 weekly allowance, adding £312 a year of tax-free reimbursement that is also deductible for the company. It is a modest sum, but across a full year it is a straightforward and entirely legitimate saving that many owner-managed companies overlook.

P11D Reporting or Payrolling Benefits: Which Applies?

When a reimbursement does not qualify for tax-free treatment, it becomes a reportable benefit, and the company must decide whether to report it on a P11D or payroll it in real time. Historically these were reported after the tax year on form P11D, with Class 1A National Insurance due from the company. The benefit is then taxed on the employee through an adjusted tax code.

The direction of travel is towards payrolling: processing the taxable value of benefits through the payroll in real time, so the income tax is collected as it arises rather than through a later coding adjustment. Payrolling removes the need to file P11Ds for those benefits, though the company still reports and pays Class 1A National Insurance. Many genuine business expenses do not need reporting at all, because the long-standing exemption for paid or reimbursed expenses removes them from the P11D regime entirely, provided they meet the qualifying conditions.

The practical point for directors is to decide, for each category of spending, whether it is exempt, reportable on a P11D, or better payrolled, and to set the company's processes up accordingly before the costs are incurred.

Whichever route is chosen, the underlying staff cost stays deductible, and our guide to what a company can deduct before corporation tax covers where it lands in the computation.

Frequently Asked Questions

What test does HMRC apply to employee expenses?

For an employee expense to be tax-free, it must be incurred wholly, exclusively and necessarily in the performance of the employee's duties. The word "necessarily" makes this stricter than the self-employed test: the cost must be one any holder of that role would have to incur, not one the employee simply chose to. Otherwise it becomes a taxable benefit.

What is the HMRC mileage rate for 2026?

HMRC's approved mileage allowance for cars and vans is 55p per mile for the first 10,000 business miles in the tax year, then 25p per mile thereafter. Payments at or below these rates are tax-free and need not be reported. For example, 12,000 business miles can be reimbursed £6,000 tax-free: 10,000 at 55p plus 2,000 at 25p.

How much subsistence can I pay an employee tax-free?

Using HMRC's benchmark scale rates, you can pay £5 where the employee is away for at least five hours, £10 for at least ten hours, and £25 for fifteen hours or more where the journey continues beyond 8pm. The journey must be a qualifying business trip and the company must operate a checking system confirming the employee genuinely travelled and incurred a cost.

Can a director claim the working-from-home allowance?

Yes. A director can draw the £6 per week (£312 per year) tax-free homeworking allowance towards additional household costs, provided there is a genuine homeworking requirement rather than personal choice. No evidence is required at this level, and the £312 is also deductible for the company. Many owner-managed companies overlook this straightforward, legitimate saving.

Is ordinary commuting an allowable expense?

No. The journey between home and a permanent workplace is ordinary commuting and is never an allowable expense, however inconvenient. Travel costs are only deductible where the journey is to a temporary workplace or undertaken in the performance of duties. Reimbursing commuting would create a taxable benefit rather than a tax-free expense.

How Blue Tick Can Help

Blue Tick Accountants advises limited company directors on building an expenses policy that keeps reimbursements tax-free, stays inside HMRC's rules, and maximises the corporation tax deduction. From mileage and subsistence to P11D reporting and payrolling, the firm makes sure nothing falls through the cracks at year end. Head to our website and book a meeting now.

Conclusion

Handled correctly, staff expenses are a tax-efficient way to support your team and reduce the company's profits, but the line between an exempt reimbursement and a taxable benefit is easy to cross. Stay within HMRC's approved figures, the 55p and 25p mileage rates, the £5, £10 and £25 subsistence scale rates, and the £6 weekly homeworking allowance, and document the business purpose of every claim. The most valuable step you can take is to decide the correct reporting route for each cost before it is paid, not after. Get that right and you protect the deduction, your employees, and yourself from an avoidable enquiry.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners across the UK build compliant, tax-efficient expenses policies covering travel, subsistence, homeworking and benefit reporting. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.