Understanding per diems in the United Kingdom: what you need to know

What is a per diem?

In the world of business travel, “per diem” is a term you often hear — but what does it mean? 

Per diems are daily allowances given to employees to cover expenses incurred while travelling for work. These allowances typically cover accommodation, meals, and other incidental costs. Per diems help ensure that employees are adequately reimbursed for their out-of-pocket expenses during business trips and simplify expense reporting.

Where does the term “per diem” come from?

The phrase “per diem” comes from Latin and means “per day,” and it is used in many languages.

In addition to referring to daily allowances for expense reimbursements related to a specific business purpose, per diem can also be used as an adjective. In that case, someone is paid a fixed amount per day, as in, “This is a per diem position.” It can be used for workers who work on an “as needed” basis and earn a daily rate, such as substitute teachers. Per diem employees are called in to work when needed and get paid each day, rather than holding full-time positions with benefits like healthcare.

According to Dictionary.com, the first records of “per diem” being used in English date back to around 1500; its first recorded use as a noun referring to a daily allowance dates to the 1800s. For the purposes of this article, we are referring to the latter definition, which refers to business expenses that fall under a per diem policy — not part-time or per diem work.

How do employers define per diem rates?

Depending on the employer, per diem expenses can be broken down in several ways.

Some business travellers might have price limits on flights and hotels and parameters on how much they can spend on related expenses like food and transport throughout a business trip.

Other employers use a fixed per diem or a set daily allowance that employers pay business travellers regardless of how much they spend. Business travellers decide whether to take themselves to a steak dinner, splurge on room service, or funnel that money toward lodging expenses for a better room.

Per diems in the UK

In the UK, per diems function similarly to those in other countries. However, there are specific guidelines and rates established by HM Revenue & Customs (HMRC) that companies must follow. Understanding these guidelines is crucial for employers and employees to ensure compliance and proper reimbursement.

HMRC subsistence rates

The HMRC subsistence rates are standard amounts the government sets that employers can pay their employees without the payments being subject to tax and National Insurance contributions. These rates are intended to cover the cost of meals and other incidental expenses incurred during business travel.

The current HMRC subsistence rates are as follows:

• £5 for travel lasting more than 5 hours
• £10 for travel lasting more than 10 hours
• £15 for travel lasting more than 15 hours (and ongoing at 8pm)

These rates are intended to cover meals and beverages. For overnight stays, employees can also claim for accommodation costs, but these must be supported by receipts.

UK subsistence allowances

A subsistence allowance in the UK is a broader term encompassing HMRC subsistence rates. It includes the daily meal allowances and other expenses that may be incurred during business travel, such as hotel stays and incidental costs. Companies may offer their own subsistence allowances, which can be more generous than the HMRC rates, but any amount above the HMRC rates may be subject to tax and National Insurance unless specifically exempted.

Per diem rates in the UK

When we talk about per diem rates in the UK, we often refer to the standard rates set by HMRC. These rates are designed to simplify the reimbursement process and ensure that employees are fairly compensated for their expenses. However, some companies may choose to set their own per diem rates based on the nature, destination, or duration of the business trip.

For example, companies might provide higher per diem rates for international travel to account for higher living costs in other countries. It's important for companies to clearly communicate their per diem policies to employees to avoid confusion and ensure compliance with HMRC guidelines.

HMRC per diem rates

The HMRC per diem rates are part of the broader subsistence allowance framework. These rates are particularly useful for employers and employees alike, as they provide a clear and tax-efficient way to handle business travel expenses. By adhering to these rates, companies can avoid the complexities of itemising and justifying every expense, while employees can have a clear understanding of what they are entitled to claim.

What are the benefits of using per diems?

There are several advantages to using per diems for both employers and employees:

• Simplified expense reporting: Per diems streamline the expense reporting process, reducing the administrative burden on both parties.
• Predictable costs: Employers can better predict travel expenses by setting fixed per diem rates.
• Fair reimbursement: Employees receive a fair and consistent amount to cover their expenses, reducing the need for detailed receipts and justifications.
• Tax efficiency: By adhering to HMRC rates, companies can ensure that per diem payments are not subject to tax and National Insurance contributions, provided the rates are not exceeded.

What are some per diem guidelines?

Business travel is a strategic lever for growth. When handled correctly, it can build employee morale and commitment. It’s therefore in a company’s interest if its employees look forward to business trips.

Employers can improve the business travel experience by taking the following steps:

• Set a generous, or at least fair, per diem amount.
• Provide corporate cards for expenses so employees aren’t pulling from their taxable income.
• Automate the expense report and per diem reimbursement process with smart technology.
• Make per diem policies actionable upon card swipe, so employees don’t have to memorise a handbook of actual expense amounts or allowed lodging rates.
• Support travellers’ safety and security with a high duty of care embedded in the travel policy.
• Make the booking and travel support process as enjoyable and efficient as possible.

Challenges and considerations

While per diems offer many benefits, there are also some challenges and considerations to keep in mind:

• Compliance: It's essential for companies to stay updated with the latest HMRC rates and guidelines to ensure compliance.
• Communication: Clear communication of per diem policies is crucial to avoid misunderstandings and disputes.
• Receipts for accommodation: While meal and incidental allowances may not require receipts, accommodation costs typically do, which can add a layer of complexity.

Conclusion

Understanding per diems and the associated HMRC subsistence rates is crucial for employers and employees engaged in business travel. By adhering to these guidelines, companies can ensure tax efficiency and fair employee reimbursement. Whether you're an employer looking to streamline your travel expense processes or an employee seeking clarity on your travel allowances, being well-versed in per diem rates in the UK is highly beneficial.

Remember, the key to effective per diem management is staying informed about the latest HMRC guidelines, maintaining clear communication with employees, and ensuring that all claims are justified and documented appropriately. With these practices in place, per diems can significantly simplify the business travel experience for everyone involved.

Learn more about how Navan makes business travel better — including how to eliminate the need to submit traditional expense reports after making the most of the per diem.