What are per diems? Definition and how per diem rates work

There are a few options available for paying your employees for business-related travel expenses:

• You can reimburse them for actual expenses incurred and submitted through an expense report
• You can supply employees with business credit cards
• You can pay them per diem which is a scale rated fixed-amount expense.  

The per diem option, or scale rate, provides employees with a fixed daily allowance to cover their travel costs and eliminates the need to manage high volumes of receipts required for expense claims.

It saves accounting time and paperwork for the business and for employees when dealing with expenses.

It also allows the business to better predict the costs of employee travel.  

When used as part of a comprehensive travel policy, scale rate reimbursement is a simple way to ensure travel expenses are tax deductible for the business and that employees are not taxed on the money they are reimbursed.  

In this article, we cover the following: 

• What does per diem cover?
• Benefits of per diems
• How do businesses pay per diem rates? How is per diem taxed 
• Per diems for the self-employed 
• Types of per diem or scale rate payments 
• Final thoughts 
• Per diem FAQs 

What does per diem cover?  

Per diem or scale rate reimbursement covers the cost of meals, lodgings, and any other travel incidentals such as parking fees for each day of business travel.

Each expense has a predetermined rate set by the UK government as further explained below, based on the average costs associated with specific locations.

Typically, how a business pays a partial per diem rate is for the first and last day of a trip, as the employee may spend part of those days at the office or at home.  

Companies need to provide travel guidelines for their employees, containing a per diem policy clearly defining what is covered, and the scale rates used for all relevant locations.  

Employees must submit daily reports to receive the reimbursement and can spend up to their daily allowance limit.

Employees can usually keep the difference if they spend under their limit, providing a valuable incentive to keep costs low and minimise expenses for the company.  

Benefits of per diems 

Per diem scale rates offer several benefits for both employees and employers: 

Simplified expense management 

Instead of keeping track of individual receipts for every meal and incidental expense, per diem offers a fixed daily allowance to cover costs.

This time and admin by reducing expense reporting. 

Cost control and budgeting  

Predetermined daily limits for travel expenses helps businesses control costs by providing a clear framework for reimbursable expenses.  

Tax benefits  

For employees, per diem payments are often non-taxable if they meet government guidelines for accountable plans, reducing their taxable income.

For employers, per diem payments are generally tax-deductible as a business expense, providing potential tax savings. 

Consistency and standardisation 

Per diem rates provide a consistent and standardised approach to reimbursing travel expenses.

Regardless of the location or duration of the trip, employees receive the same daily allowance (based on the two types of per diem payment shared below).

This avoids discrepancies over reimbursement amounts and ensures fairness among employees. 

Flexibility for employees  

Employees get the freedom to decide how to allocate the daily allowance between meals, lodging, and incidentals, as long as the total amount remains within the per diem rate.

This flexibility allows employees to adapt to their specific needs and preferences during travel. 

Time and productivity 

Per diem saves time for employees by allowing them to focus more on their work and productivity during business trips, while employers can allocate resources to more strategic activities rather than expense management. 

Incentivising cost-conscious behaviour 

A fixed daily allowance motivates employees to make cost-conscious decisions, such as choosing reasonably priced meals and accommodation. 

How do businesses pay per diem rates?  

Companies can make these payments to employees either electronically or by cheque, and they should be issued separately from wages.

Per diem reimbursements are not subject to taxes, but must be declared regularly, usually weekly or monthly so the business can claim them in good time.

How is per diem taxed?  

Employee travel expenses, including per diem reimbursements, are allowable business deductions provided they are backed up with an “accountable plan”.

The government guidelines require expenses are business related, are adequately accounted for by a daily report submitted by employees, and any amounts exceeding the set rates are returned by the employee within a reasonable time frame.  

Per diem payments are not taxable for employees provided the required daily reports contain the following information:

• Business purpose of the expense,
• Date, time, place and amount of the expense
• Receipts for lodging.

Employees don’t need to submit meal or incidental receipts with the report.  

Per diems for the self-employed 

Self-employed people can also use per diems to manage their travel expenses.

This can be useful if you find yourself frequently attending conferences, meeting clients, or conducting site visits.  

Instead of being paid by an employer, you simply claim per diem as a deductible business expense.

This means you can deduct these payments from your taxable income, reducing your overall tax liability. 

Per diem rates should be set in line with the government guidelines and you should keep track of your travel dates, destinations, and the purpose of each trip.

Document your expenses for meals, lodging, and incidental costs. 

While per diem eliminates the need for detailed receipts, it’s still best to retain receipts for larger expenses or situations where additional documentation may be required. 

Types of per diem or scale rate payments 

Other countries, such as the US, have different types of per diem or scale rate payments to account for differences in types of travel and location.

In the UK, the rate for employees is also different depending on travel type and location.

However, in general, the rate follows what has been set out by the government.

Final thoughts  

Every employer wants a happy and engaged team, and two important components are building streamlined processes and job flexibility.

So, consider whether introducing one or both types of per diem could help take your business to the next level.

Per diem FAQs 

Are per diem payments taxable?  

Per diem payments can be taxable or non-taxable depending on the purpose of travel and the governing tax regulations.

For business-related travel, per diem payments are often non-taxable if they meet the government guidelines for accountable plans. 

What expenses does per diem cover?  

Per diem typically covers expenses related to meals, lodging, and incidental costs incurred during travel.

It provides a standardised daily allowance to cover these expenses without requiring detailed receipts for each individual expense. 

Who is eligible for per diem?  

This varies depending on the organisation or governing body. Generally, employees who are required to travel for business purposes or people working on specific projects away from their regular workplace may be eligible. 

Can per diem rates change over time?  

Yes, they can change due to factors such as inflation, changes in travel costs, or updates to government regulations.

Always stay informed about the latest per diem rates applicable to your travel destinations. 

How do I claim per diem expenses?  

You usually need to maintain accurate records of your travel, including dates, destinations, and the purpose of the trip.

Some organisations may require staff to submit expense reports or use specific forms for reimbursement.  

Are there per diem rates for international travel?  

Yes. When traveling internationally, per diem rates may vary based on the country and city you visit, considering factors such as exchange rates and local costs. 

You can check the changing rates on the government website.

Can per diem be combined with other travel expenses?  

Yes. It can often be combined with other expenses such as transportation costs (e.g. airfare, taxi fares) and business-related expenses (e.g. conference registration fees).