Income Tax (Earnings and Pensions) Act 2003 section 289A

Exemption for paid or reimbursed expenses

Section 289A provides exemptions from income tax for amounts paid or reimbursed to employees in respect of expenses, provided certain conditions are met and the amounts are not funded through salary sacrifice arrangements.

• Where an employer pays or reimburses an employee's expenses, no income tax arises if the employee would have been entitled to claim a tax deduction for at least the same amount — provided the payment is not made under a salary sacrifice arrangement.
• Scale rate or flat rate expense payments are also exempt from income tax, provided they are calculated in an approved way (either under HMRC regulations or an employer-specific HMRC approval), the employer operates a checking system to verify the expenses are genuinely incurred and would be deductible, and the payment is not made under a salary sacrifice arrangement.
• Payments or reimbursements for qualifying travel expenses are exempt if calculated using HMRC-published rates, the employer checks the travel actually took place, and no salary sacrifice arrangement is involved.
• A salary sacrifice arrangement — where an employee gives up salary or other earnings in return for expense payments or reimbursements, or where the level of other earnings depends on the expense amount — will disqualify the exemption in all cases.