If you pay your staff extra money for things that aren’t part of their usual wages or salary — like accommodation or travel costs — these payments are known as employee allowances. Some allowances are taxable and others are tax free, depending on the circumstances.

Paying tax on employee allowances

As a small business owner, it’s important to know which allowances need to be taxed via the PAYE system. In many cases, employee allowances are tax-free, with examples given on this page.

Generally, if you provide accommodation or an accommodation allowance to an employee, it's taxable via PAYE, but tax isn't paid on all accommodation allowances.

Tax-free allowances include accommodation payments to employees who are:

• attending a work-related meeting, conference or training course that requires them to stay overnight
• working somewhere they can’t easily travel to every day, eg on secondment.

There are also accommodation allowance tax exemptions for Canterbury earthquake reconstruction projects.

Accommodation allowances(external link) — Inland Revenue

You can provide these allowances to employees to help cover the costs of meals and clothing they have to buy as part of their job. They're usually tax-exempt.

Examples of common tax-free meal and clothing allowances include:

• payments to cover meals for employees working away from the employer’s premises
• payments provided to an employee to cover the cost of clothing for work, like uniforms or protective gear.

Meal and clothing allowances(external link) — Inland Revenue

These are paid to employees for travel between their home and work. These are usually taxed via PAYE but will be tax-free for employees:

• working outside their normal hours, eg overtime, shift or weekend work
• carrying work-related tools and equipment, eg the employee usually takes the bus to work but must use a taxi or their own vehicle to transport work-related gear
• travelling to do something you need done for your business
• who have a temporary change in workplace
• with no adequate public transport system serving their workplace.

Travel allowances(external link) — Inland Revenue

Benefit allowances are regular payments made in addition to an employee’s salary or wages, and include things like:

• food allowances, eg payments to subsidise meals at a workplace cafe or canteen
• clothing allowances, eg to buy a suit to wear at work (but not a uniform)
• free or subsidised board, eg a farm worker paying below-market rent for a farm cottage.

These are taxable. Because you pay benefit allowances as part of your employee’s wages, PAYE is taken off these payments.

Paying tax on non-exempt benefit allowances(external link) — Inland Revenue

Reimbursing allowances are paid to employees to refund them for any unexpected on-the-job expenses that they incur — like paying for meals or travel when they’re away from their normal workplace.

If an employee pays for something out of their own pocket, you’ll need to reimburse them for the cost. They can either provide you with receipts for anything they pay for, or you can make a reasonable estimate of how much they should be paid back.

Reimbursements are generally paid to the employee in their pay. They’re added to the employee’s net salary after their PAYE has been taken out. You don't pay tax on reimbursing allowances (unless you pay back more than the employment-related expense — then the difference between the employment-related cost and what you pay is subject to PAYE).

Reimbursing allowances (external link)— Inland Revenue

Claiming GST on employee allowances

If you’re registered for GST, you can claim GST credits on reimbursements paid to employees for business expenses. You can’t claim GST on any allowances paid to employees that aren’t reimbursements for employment-related expenses, or those paid for their private expenses.