As an employer, you can choose to provide allowances on top of your employees’ usual pay. Allowances are extra payments for things like accommodation, meals and clothing, and are taxed through PAYE.
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.
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.
Test your knowledge on employee allowances and fringe benefit tax. When you’re done, follow the links in the answers for more details.
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:
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:
Meal and clothing allowances (external link) — Inland Revenue
Employers, not employees, pay FBT when they provide a perk or benefit to their staff, eg gym membership or a work vehicle also available for personal use.
Travelling allowances (external link) — Inland Revenue
Benefit allowances are regular payments made in addition to an employee’s salary or wages, and include things like:
These are taxable. Because you pay benefit allowances as part of your employee’s wages, PAYE is taken off these payments.
Benefit allowances and their taxable value (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
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.
It’s important to keep good records about employee allowance payments — both for payments that are taxable and those that aren’t. You need to have the paperwork to prove your payments meet any tax-exemption standards.
Your employee allowance records are subject to all the standard record keeping rules. They must be saved for seven years and kept in English unless Inland Revenue approves another language.