Should Expenses be Paid Through Payroll?

If you run a business, at some point it’s inevitable that you’ll need to reimburse expenses incurred by employees in the course of their work. So, what's the best option for employee expense reimbursement? Should expenses be paid through payroll, or separately? And why does it matter?

This guide to the pros and cons of paying expenses through payroll covers all you need to know. And if you’re looking for a smart way to help you manage employee expenses in pounds or foreign currencies, you may find the Wise Business card useful, with low cost spending across currencies, with the mid-market exchange rate and no foreign transaction fees. More on that later.

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How does paying expenses through payroll work?

If you need to pay or reimburse employee expenses you might be considering having payroll and expenses combined, to make one single payment to your employee at the end of the month.

While this is one way to reimburse employee expenses, it’s not usually the best - as we’ll see in this guide. Paying employee expenses through payroll can result in delays for the employee waiting for reimbursement, and additional administration and compliance issues for you and your finance team.

Read on for all you need to know.

Why to avoid paying expenses through payroll?

As a general rule, UK businesses should avoid paying employee expenses through payroll. There are some pretty good reasons for this, which run from issues this process can cause the employee, to serious compliance complications for the employer.

From the perspective of the employee, receiving expense payments as part of a monthly salary payment will inevitably mean additional wait time for reimbursement. Employee out of pocket expense spending is likely to be ad hoc, while payroll runs to a fixed schedule. There are also likely to be approvals required for expense reimbursement which can further complicate the timeline. 

If employees incur an expense right at the end of a month, and the approval process misses the cut off for that month’s pay run, they’ll need to wait until the next month’s end for reimbursement. If you’ve just booked expensive flights for a business trip, this could mean being out of pocket for a significant time, causing the employee cash flow issues.

For the employer, the key issue is probably around compliance. You don’t usually have to pay or deduct National Insurance on eligible business expenses¹. However, adding in expense reimbursements to payroll can cause confusion as expense payments should be treated differently to income for tax in most cases. 

There needs to be a comprehensive audit process for expense payments, which requires tracking and documentation. Adding this into the pay cycle can create an additional administrative burden for the finance team - and getting it wrong will leave you liable to penalties and issues with HMRC down the line. On top of all this, having salary and expenses in one payment can make reconciliations more difficult - and again increase the admin needed.

Benefits of keeping employee expenses separated from payroll

Keeping employee expense payments separate from payroll increases efficiency, which can pay dividends for both the employee and employer.

For the employee, having expenses paid on a more regular cycle compared to payroll means there’s less time to wait for a reimbursement. For the employer, keeping the two payment types separate can make both easier to administer and cut down the overall complexity and time required. 

By keeping expenses and payroll separate, you also have the option as employer to out source one or both processes to a third party. This does involve fees, but can speed things up and leave your own team more time to focus on value adding activities.

Making advance expense payments to employees? Learn more about the do’s and don’ts of advance expense payments here.

How to manage employee expenses?

You can manage employee expenses manually, through a fully automated expense management system, or with a hybrid approach which may include different tools and options depending on the expense type. 

The employee expense management process tends to be fairly similar in all cases - the main difference is how much manual intervention, and management or finance time, is needed.

Generally, after an employee spends on behalf of the business, they’ll need to document this spending by submitting an invoice or receipt and a description of the spend. This passes through an approval process which could be manual or automatic, and which is designed to stop unauthorised reimbursements.

Once an expense is approved it can be reimbursed to the employee - either through payroll or as a separate payment. Finance teams tend to keep up with expense tracking with expense reports which give an overview of business spending and allow for easier account reconciliation.

Throughout this process there are opportunities to make the steps easier to manage, and to cut costs. Many companies, for example, use employee spending and expense cards like the Wise Business card which allows you to set individual spending limits, and automate reporting processes. This means the employee is not out of pocket - but you’re still in control of overall spend. 

Learn more about small business expense tracking here.

Common reimbursable expenses

Ultimately, which business expenses can be reimbursed to your employees will depend a little on your specific company and your own internal expense policies. However, some common expenses that can be reimbursed to employees include costs with:

• Business travel and accommodation
• Entertaining and hospitality for clients or customers 
• Equipment which is essential for the employees duties
• Training or development which are needed for the role
• Professional memberships, subscriptions and so on
• Mobile phone, internet etc if needed for work

FAQs - employee expense reimbursement

How to reimburse employees for expenses?

There are several options for employee expense reimbursement which can suit different business needs. While it is possible to reimburse employees through payroll, this is not always the easiest or most suitable option. Expense payments are subject to different tax rules compared to income, which complicates matters, and also need a significant audit trail - all extra admin for your finance team.

Keeping expense payments separate from salary is usually the better option, which can also allow you to use specialist expense management software or solutions to keep everything in order with minimum administration.

Can expenses be paid in cash?

Theoretically, expenses could be reimbursed in cash. However, you’d still need to follow robust reporting processes, and keep an adequate audit trail of any payments made. Using electronic payments, or issuing employees with a business card to spend on in-policy expenses can reduce admin and risk.

How quickly should expenses be paid?

If an employee has paid out of pocket for something on behalf of the business it makes sense to reimburse them as soon as possible. This is most easily done if you have an agreed expense claims and payment policy in place which sets out the information and documents the employee should submit, the approvals required, and the payment process.

How to account for employee expenses?

Generally when an employee incurs an expense they’ll capture a receipt or invoice to allow for approval and also to help categorise the spend for accounting purposes. The expense can be sent in for reporting, and coded by finance to allow for easier reconciliations and tax accounting. The details of this process may vary from company to company - many businesses opt for a third party service which helps support employee expense management and which integrates with their normal accounting software for ease of use and a smoother process.

What is the expense reimbursement policy?

Your business should have an expense reimbursement policy which clearly sets out which expenses are allowable, how to document expense spending, and the process for reimbursement. By laying this all out you reduce the risk of accidental employee overspending or abuse, which means you can keep a closer control of your business spending and profitability overall.

How to reimburse yourself for business expenses?

If you need to pay for business expenses, it’s best to do so from your business account. However, if this is not possible and you have to use a personal account, you can still reclaim the allowable expense by following an expense management process. This will require you to document the spending, have proof of it, and to be able to explain at audit why it is necessary business spending. As long as you have evidence and records, you can usually pay yourself back from your business funds, and reconcile your accounts to show the expense being paid.

Wise Business expense cards: international expenses made easy

If your business operates internationally and your employees are regularly spending time abroad for work, Wise Business expense cards could be the ideal solution. 

These contactless international debit cards work for spending and cash withdrawals in  countries worldwide, with no foreign transaction fees or subscription fees. 

Whenever someone spends or withdraws cash overseas, the currency is converted at the mid-market exchange rate, with just a small conversion fee to pay. 

There’s also 0.5% cashback paid on all eligible spending. 

Once you have a Wise Business account, you can order unlimited expense cards for just a one-off fee of £3 a card. You can add employees to your account, with controlled access - and you get full control over spending their limits. 

What’s more, it’s easy to integrate Wise with your accounting tools, and your accountant can view team spending for smarter collaboration.

Get started with Wise Business 🚀

On the face of it, paying employee expenses through payroll may seem like a simple solution to a common problem. However, it’s not ideal in most cases because paying expenses through payroll can make the accounting, tax and administration processes involved far more complicated than they need to be. Most businesses find that paying payroll on the regular schedule, and then selecting an alternative approach to reimburse allowable expenses is better for the business - and for the employee too, reducing waiting times and making the system hassle free.

Sources used in this article:

Sources last checked December 18, 2024