Since 6 April 2016, section 289A ITEPA 2003 exempts from tax and National Insurance any expense an employer pays or reimburses where the employee could have claimed an equal deduction themselves. It replaced dispensations, needs no application and means qualifying expenses are not reported on form P11D. Employers paying actual costs need only be satisfied each expense is deductible; those paying scale rates must also run a checking system.

What did the exemption replace?

Before April 2016 an employer that wanted to stop reporting routine business expenses on P11Ds had to apply to HMRC for a dispensation under section 65 ITEPA 2003. EIM30215 explains that section 65 was repealed and all dispensations ceased to have effect after 5 April 2016. The replacement is Chapter 7A of Part 4 ITEPA 2003 (sections 289A to 289E), inserted by section 11 of Finance Act 2015.

The practical difference is that the exemption is automatic. EIM30210 says employers do not need to apply to HMRC to pay or reimburse qualifying expenses in full; they only need to satisfy themselves, at the time of payment, that the expense would be fully deductible. HMRC describes this as a process the employer can carry out in real time.

Which expenses does it cover?

Section 289A(1) removes the charge on an amount paid or reimbursed where an equal or greater deduction would be allowed under Chapter 2 (the general rules, including travel) or Chapter 5 (fees and subscriptions) of Part 5 ITEPA 2003. Section 289D does the same for benefits in kind where an equal deduction would be allowed under Chapter 3 of Part 5. HMRC’s guide 480 lists the common items covered:

  • business travel, including subsistence on that travel, under the temporary workplace rules;
  • business entertainment expenses;
  • business use of credit cards;
  • fees and subscriptions, including those to List 3 bodies.

Some payments sit outside it. Guide 480 notes that mileage allowance payments have their own statutory exemption (see approved mileage allowance payments), and that round sum allowances, paid whatever the employee actually spends, are not covered. Payments for private expenses are simply earnings.

What about payments that are only partly deductible?

EIM30220 says that for mixed payments where the allowable part is clearly identifiable, the exemption applies to that part and only the rest goes through payroll. A benefit that is only partly exempt is different: it must be reported or payrolled in full, and the employee then claims a deduction for the exempt part from HMRC. Getting this distinction wrong is a frequent cause of P11D errors; see benefits in kind and form P11D.

How do scale rate payments fit in?

Paying a flat rate rather than actual costs is allowed only if the rate is calculated in an approved way: either under the Income Tax (Approved Expenses) Regulations 2015 or under a bespoke approval notice given under section 289B. For those payments the law adds conditions. Under section 289A(3) and (4):

  • Condition A: the payer, or someone else, operates a system for checking that employees are actually incurring and paying expenses of that kind, and that a deduction would be allowed.
  • Condition B: nobody operating the system knows or suspects, or could reasonably be expected to know or suspect, that the employee did not incur the expense or that no deduction would be allowed.

Since 6 April 2019, payments at HMRC’s benchmark and overseas rates instead fall under section 289A(2A), where Condition C only requires a check that the qualifying travel took place. Bespoke and industry rates still need Conditions A and B. The rates themselves are covered in benchmark scale rates and bespoke rates.

What does an acceptable checking system look like?

EIM30270 sets out HMRC’s expectations. The key requirement is that someone other than the employee who incurred the expense is responsible for confirming that each payment relates to qualifying travel, contains no disallowable items and is not excessive. How much checking is needed depends on risk factors, including:

  • the size and complexity of the workforce;
  • uncertainty over whether staff qualify, for example under the temporary workplace rules;
  • irregular or non standard working patterns;
  • whether the employer has run an expenses regime before, and how well.

Checks should happen regularly during the year, monthly, quarterly or half yearly depending on the risk, and should review the records and receipts of a random sample of staff who are not told in advance. EIM30275 gives model systems HMRC will accept, ranging from a random 10% check of claims over one month every six months for a large employer, to an independent third party checking a sample of a one person company’s diary and receipts each month.

Two practical points stand out. In a small organisation where none of the risk factors are present and the directors know what expenses staff incur, EIM30270 accepts that no formal checking may be needed. But where director shareholders have a free hand to decide what they take as expenses, HMRC says it will not usually be appropriate for their payments to be exempt under a scale rate, although other employees can still be included.

Why are salary sacrifice arrangements excluded?

Section 289A(5) defines a relevant salary sacrifice arrangement as one where the employee gives up earnings in return for the payment, or where other earnings depend on the amount of the payment. EIM30230 gives two examples: an hourly rate reduced in exchange for benchmark rate expenses, and a bonus that varies with the expenses paid. In both cases the expenses must go through payroll with PAYE and Class 1 National Insurance, and the employee claims any genuine deduction from HMRC. A bonus set as a fixed percentage of salary does not taint the arrangement. See salary sacrifice schemes for the wider rules.

Is there an anti avoidance rule?

Yes. Section 289E switches off both exemptions where, under arrangements, an expense payment or benefit replaces earnings that would otherwise have been taxable or subject to National Insurance, and the main purpose or one of the main purposes is avoiding tax or contributions. In other words, it targets arrangements that repackage taxable pay as expenses or benefits.

How does this play out for a small employer?

Illustration only. A ten person consultancy reimburses actual train fares and hotel bills for client visits, pays subscriptions to staff members’ professional institutes, and pays the benchmark meal allowances. It pays a flat £30 a month phone allowance to everyone. The train, hotel and subscription reimbursements are exempt with no reporting because each is deductible. The meal allowances are exempt if the firm keeps a record, such as a shared diary, showing that each journey happened. The phone allowance is a round sum allowance, so it is taxable through payroll. If the firm later lets staff swap salary for higher meal allowances, those allowances lose the exemption.

What mistakes come up most often?

  • Treating round sum allowances as exempt because most of the money is spent on business costs.
  • Reimbursing home to permanent workplace travel, which is never deductible.
  • Having employees approve their own claims, so no independent check exists.
  • Leaving owner directors’ scale rate payments within the exemption without an independent check.
  • Paying expenses through a salary sacrifice or pay dependent structure.
  • Relying on an old dispensation letter, which has had no effect since April 2016.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.