(This article was last updated on 01 November 2024.)
Managing and reimbursing employee expenses is a crucial aspect of running a business. However, it often leads to confusion, especially when deciding how and when to process and pay expense claims.
One common question employers ask is:
Should employee expenses be paid through payroll?
In short, no. While combining expenses with payroll might seem convenient, it can introduce unnecessary complexities and potential financial compliance issues.
This comprehensive guide explores why expenses should not be paid through payroll, the drawbacks of doing so, and alternative solutions for efficient expense management.
What is Payroll?
Simply put, payroll is how you compensate your employees for their work.
While it might seem straightforward, there's a bit more to it than just issuing a payment. Here's what payroll typically includes:
Calculating gross pay: Determining wages based on hours worked and pay rates.
Withholding deductions: Next, you subtract taxes, National Insurance contributions, and any other necessary deductions like pension contributions.
Disbursing net pay: After deductions, you pay your employees the net amount owed to them, usually via cheque or direct deposit.
Record-keeping: It's important to keep detailed records for compliance and reporting purposes. This includes pay slips, tax documents, and other payroll-related records.
Because payroll can get quite complex - especially as your business grows - many companies choose to outsource their payroll functions or use cloud-based software to automate calculations and ensure accuracy.
Which Employee Expenses Can Be Reimbursed?
Wondering which employee expenses you can reimburse and whether you should pay them through payroll?
Let's clear up the confusion so you can handle expense reimbursements confidently.
Qualifying for Expense Reimbursement
You can reimburse your employees for out-of-pocket expenses they've incurred while performing their job duties.
For an expense to qualify for reimbursement, it must meet the following criteria:
Incurred personally by the employee: The employee paid for the expense themselves, not someone else.
Directly related to their role: The expense was necessary for them to carry out their job effectively.
Proper documentation provided: The employee has valid expense receipts or invoices to support the expense claim.
Common Reimbursable Expenses
Employees may claim a variety of expenses.
Here are some common ones:
Business travel costs: Transportation, accommodation, and meals during business trips.
Professional subscriptions: Fees for memberships in professional bodies relevant to their role.
Equipment purchases: Tools or equipment required to perform their job.
Communication expenses: Business-related phone calls or internet usage.
Training and development: Costs for courses or certifications that enhance job performance.
For a deeper dive into what expenses can be claimed, check out these helpful articles:
So, Should Employee Expenses Be Paid Through Payroll?
Generally, no.
Legitimate business expense reimbursements are not considered taxable income and should not be included in your employees' taxable wages. Including them in payroll could lead to tax complications and affect your employees' net pay.
The Drawbacks of Paying Expenses Through Payroll
While it might seem efficient, this approach can introduce several challenges that may affect your business and employees.
1. Increased Administrative Burden
Paying expenses through payroll complicates your payroll process.
Here's how:
Extra tracking required: You'll need to separately track expenses and wages.
Complex calculations: Mixing expenses with salaries adds layers of calculations.
Heavier workload: Your finance team faces increased administrative tasks.
What Happens If You Pay Expenses Through Payroll Without Proper Documentation?
If you fail to document expenses properly, you could run into compliance issues with HMRC, including potential fines and audits.
Proper documentation is essential to justify expense reimbursements and avoid penalties.
2. Delayed Reimbursements
When expenses are processed through payroll, employees might have to wait until the next payroll cycle to get reimbursed.
This delay can lead to dissatisfaction, especially if they've incurred significant expenses.
How Quickly Should You Reimburse Employee Expenses?
Best practice is to reimburse expenses promptly - ideally within the same month the expense was incurred.
Timely reimbursements improve employee satisfaction and reduce financial strain on your team.
3. Complicated Reconciliation
Integrating expenses into payroll makes financial reconciliation more complex.
Separating wages from expense reimbursements becomes challenging, increasing the risk of accounting errors.
Difficulty in distinguishing funds: Wages and expenses get lumped together.
Higher risk of errors: The added complexity can lead to mistakes in your financial records.
Time-consuming corrections: Resolving these errors can drain valuable time and resources.
4. HMRC Compliance Issues
When using HMRC's payrolling benefits and expenses online service, you must follow strict guidelines:
Register before the tax year starts: Missing the deadline means you can't payroll benefits until the next tax year unless you have a reasonable excuse.
Calculate Class 1A National Insurance contributions: You're still required to work out these contributions on benefits.
Complete Form P11D(b): Reporting expenses and benefits becomes more complicated.
For detailed information, visit the HMRC Expenses and Benefits Guide.
Need a better way to manage employee expenses? Tools like ExpenseIn can simplify expense management and ensure timely reimbursements. Book a free demo today to learn how we can help your business manage expenses more efficiently.
The Benefits of Keeping Employee Expenses Separate from Payroll
Keeping expense reimbursements separate from payroll offers several benefits that can make your business run more smoothly.
Let's explore why this approach might be the best choice for you:
1. Faster Reimbursements
Handling expenses separately means your employees get their money back quicker. No more waiting until the next payday.
Quick payments: Employees receive reimbursements promptly, reducing any financial strain.
Happy team: Timely reimbursements show your staff that you value their contributions.
2. Simplified Accounting
Separating expenses from payroll makes your financial records cleaner and easier to manage.
It simplifies expense tracking and reconciling, saving you time and headaches.
Clear records: Easily distinguish between wages and expense reimbursements.
Fewer errors: Simplifies bookkeeping and minimises accounting mistakes.
3. Compliance Assurance
By keeping expenses separate, you reduce the risk of non-compliance with HMRC regulations. This helps you avoid potential fines and audits.
Stay HMRC-compliant: Aligns with HMRC guidelines and reduces legal risks.
Avoid penalties: Proper handling of expenses keeps you on the right side of the law.
4. Increased Efficiency
Using specialised expense management software streamlines your processes. This allows you to focus on what really matters - growing your business.
Automated processes: Utilise business expense tracker apps to handle reimbursements effortlessly.
Save time: Reduce administrative tasks and improve overall efficiency.
Ready to simplify your expense management? Book a demo with ExpenseIn and see for yourself how easy it can be.
Simplify Expense Management with Cloud-Based Software
Manual expense processing can be a real headache. It's time-consuming, error-prone, and can lead to delays in reimbursements.
By implementing a cloud-based expense management system like ExpenseIn, you can streamline the entire process and keep employee expenses separate from payroll.
Features of ExpenseIn
Here’s how ExpenseIn can revolutionise the way you handle employee expenses:
AI-powered receipt scanning: Employees submit expenses by photographing receipts with their smartphones.
Automated policy enforcement: Ensures all claims comply with your company's expense policy.
Flexible approval workflows: Customise approval processes to fit your business structure.
Mileage tracking: Automatically calculates mileage expenses using GPS data.
Real-time reporting: Provides up-to-date data for informed decision-making.
Integration with accounting software: Seamlessly syncs with systems like QuickBooks or Xero.
Ready to Take Control of Your Expense Management?
In wrapping up, it's clear that paying employee expenses through payroll can create more problems than it solves - adding administrative burdens, complicating compliance, and delaying reimbursements.
By keeping expenses separate, you not only streamline your accounting but also boost employee satisfaction and stay on the right side of HMRC regulations.
Why navigate these challenges alone when there's a better way?
With ExpenseIn, you can automate your expense management process, save valuable time, and focus on what really matters.
Book a free demo with ExpenseIn today and discover how easy efficient expense management can be.
