A round sum allowance is a fixed amount paid to an employee whatever they actually spend, such as a monthly phone, tools or travel allowance. It is taxed as earnings: PAYE applies to the whole amount, and Class 1 National Insurance is due on it unless the employer can identify specific business expenses within it. The paid and reimbursed expenses exemption does not cover round sums, but the employee can often claim tax relief for genuine business costs.

What counts as a round sum allowance?

HMRC’s Employment Income Manual at EIM05100 defines a round sum expenses allowance as one paid to an employee irrespective of whether they spend it, or spend it in a particular way. It contrasts this with reimbursing expenditure the employee has actually incurred, and with a scale rate payment designed to reimburse such expenditure. GOV.UK’s guidance on cash sum payments describes round sum allowances as a set amount of cash given to employees regardless of how they spend it.

The label the employer uses makes no difference. A “car allowance”, “phone allowance”, “tool allowance”, “laundry allowance” or “expenses float” that is paid at a flat rate and never compared with what the employee spent is a round sum. EIM05100 relies on Fergusson v Noble, where a detective received a cash allowance for buying plain clothes whether or not he spent it. The allowance was taxable because it was part of what he was entitled to for his services. It did not matter that he was expected to spend it in a particular way.

How is it different from reimbursing expenses?

Reimbursing actual business costs is normally free of tax and National Insurance under section 289A ITEPA, provided the employee could have claimed a deduction for the same amount; see our page on the paid and reimbursed expenses exemption. HMRC’s guide 480 states at paragraph 2.4 that the exemption does not apply to round sum expense allowances.

Scale rates sit between the two. EIM05200 says a scale rate calculated to do no more than reimburse allowable expenses is not a round sum allowance, but a scale rate paid whether or not the employee incurred an allowable expense is simply earnings under section 62. For the exemption to apply, the rate has to be one of HMRC’s benchmark rates or a bespoke rate approved by HMRC under section 289B. NIM05015 explains that since 6 April 2016 a scale rate that has not been approved in either of those ways is treated as a round sum allowance for National Insurance. Our page on benchmark scale rates explains the checking system needed to use them.

How is income tax handled?

EIM05100 says a round sum allowance is taxable as earnings under section 62 and that PAYE applies. GOV.UK’s cash sum guidance tells employers to add the full amount of the allowance to the employee’s other earnings when deducting PAYE through payroll. It does not go on form P11D; it goes through payroll in the period it is paid, like salary.

HMRC’s guide 490, at paragraph 9.6, says that a round sum allowance for business travel is not regarded as reimbursing actual expenditure, and the whole allowance is gross pay for PAYE. The exception is where HMRC has agreed in an approval notice that the payment is clearly intended to do no more than reimburse expenses actually incurred in the duties.

How is National Insurance worked out?

HMRC’s National Insurance Manual at NIM06160 says a round sum allowance is earnings and liable to Class 1 because it is a payment made to or for the benefit of the employee. Business expenses are normally disregarded under regulation 25 and paragraph 9 of Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001, which covers “any specific and distinct payment of, or contribution towards, expenses which an employed earner actually incurs in carrying out his employment”. A round sum does not identify any expenses, so it does not meet that test.

There is one concession in the National Insurance rules that does not exist for PAYE. NIM06160 says that if the employer can identify the actual business expenses incurred within the allowance, those amounts can be excluded and Class 1 is due only on the profit element. GOV.UK puts it the same way: Class 1 is calculated on the allowance minus any specific business expenses covered by it. Guide 490, chapter 6, adds the practical point: if no specific business expenses have been identified when the allowance is paid, the whole payment attracts Class 1 for that pay period.

NIM05015 records that the Social Security (Contributions) (Amendment) (No. 2) Regulations 2016 (SI 2016/352) amended the rules from 6 April 2016 so that expenses paid by round sum, by an unapproved scale rate or through salary sacrifice cannot be disregarded, mirroring the income tax changes.

Can the employee get tax relief on what they spent?

Yes, for genuine business costs. Guide 490 at paragraph 9.8 says that where a round sum or unapproved payment has been taxed in full, the employee is still entitled to tax relief for the full cost of business travel, except business mileage, where special rules apply. HMRC’s own example is a safety inspector paid £300 for her hotel and evening meal regardless of how she spends it, who rarely spends more than £150: the employer must deduct tax and National Insurance on the allowance, and she can claim relief for the full cost of her business travel at the end of the tax year.

GOV.UK’s guidance on job expenses explains how to claim, and that anyone in Self Assessment must claim through the return; see claiming employment expenses. Relief is limited to costs that meet the deduction rules, so the private part of an allowance is never relieved. Flat rate expenses for uniforms and tools are a separate employee claim; GOV.UK’s guidance on uniforms, work clothing and tools says that if the employer pays all the expenses, no relief can be claimed. See clothing and uniform expenses.

Which fixed payments are not round sum allowances?

Some flat payments have their own statutory exemptions:

  • Homeworking costs. Under section 316A, EIM01476 allows £6 a week, or £26 a month for monthly paid staff, to an employee working regularly at home under arrangements with the employer, without the employer having to justify the amount. See working from home expenses.
  • Mileage. Mileage allowance payments for business travel in the employee’s own vehicle are exempt up to the approved amount; see approved mileage allowance payments. A flat monthly car allowance is not a mileage payment.
  • Approved scale rates, as described above.

How does this work in practice?

Illustration only. An employer pays a field engineer a flat £50 a month “phone and travel allowance”. In one month the engineer’s itemised bill shows £12 of business calls and the employer holds that record when it runs payroll.

  • PAYE: deducted on the full £50.
  • Class 1: due on £38, because £12 of specific business expenses has been identified within the allowance.
  • The engineer can claim tax relief for genuine business travel costs paid from their own pocket.

If the employer switched to reimbursing receipted business calls and journeys, nothing would go through payroll and nothing would be reported.

What mistakes come up most often?

  • Treating an allowance as exempt because most of it is spent on business costs.
  • Reporting a round sum on the P11D instead of putting it through payroll.
  • Paying an allowance described as a “scale rate” that HMRC has never approved and that is not a benchmark rate.
  • Forgetting the National Insurance concession for identified business expenses, and overpaying Class 1.
  • Assuming the employee cannot claim relief because the employer paid an allowance.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.