Ultimate small business guide to per diems: Meaning, types and rates

Published Thursday 2 July 2026

Table of contents

• What is per diem allowance?
• How per diem works in the UK
• Per diem types and rates
• Is per diem taxable in the UK?
• Per diem vs expense reimbursement
• Per diem for self-employed and sole traders
• Set up per diem in Xero
• FAQs on per diem

Key takeaways

• Per diem is a fixed daily allowance for business travel expenses, and HMRC benchmark scale rates let you pay employees tax-free if you meet evidence requirements.
• Stay within HMRC benchmarks and keep proper records, and per diem payments remain tax-free. Exceed them or skip checks, and they may count as taxable income.
• A clear per diem policy reduces admin compared to reimbursing individual receipts, but you still need a checking system and audit trails.
• Self-employed and sole traders can't use per diem the same way, but HMRC simplified expenses offer flat-rate alternatives for business costs.

What is per diem allowance?

A per diem allowance is a fixed daily payment an employer gives employees to cover meals, accommodation, and incidental expenses during business travel. The term per diem comes from Latin, meaning "per day."

Per diem typically covers meals and incidental expenses (M&IE), which include food, drinks, tips, and small costs like laundry or phone calls while travelling for work. Some employers also include lodging in their per diem policy, though this is often handled separately.

Instead of reimbursing every receipt, you pay a standard daily rate. This simplifies expense claims, reduces paperwork, and gives employees certainty about what they can spend.

In the UK, per diem is often referred to as a subsistence allowance. HMRC uses the term "benchmark scale rates" for the standard daily amounts employers can pay tax-free. For small businesses with staff who travel regularly, a per diem allowance can save significant admin time compared to processing individual receipts.

How per diem works in the UK

In the UK, per diem works through HMRC's subsistence framework. HMRC allows employers to pay "benchmark scale rates" for business travel expenses. These are fixed daily amounts you can pay without needing employees to submit receipts, provided you meet certain conditions.

These rules are set out in HMRC's employment income manual on benchmark scale rates.

Key HMRC conditions

To use per diem rates in the UK compliantly, you'll need to meet these requirements:

• The trip must be qualifying business travel, not a regular commute to a permanent workplace.
• The employee must be travelling to a temporary workplace, which is any location they attend for a limited period or on an irregular basis.
• The employee must have actually incurred a cost, even if no receipt is required.
• The payment must not exceed HMRC benchmark rates.
• You must operate a checking system to verify claims.

HMRC also expects businesses to keep proper records. You can find broader compliance guidance in VAT record-keeping rules and self-employed record requirements on GOV.UK.

Worked example

Suppose an employee leaves the office at 8 am for a client meeting in another city and returns at 4 pm, making it a trip of 8 hours. Under HMRC benchmark scale rates, they'd qualify for the 5-hour rate of £5. Since the trip lasted 8 hours but didn't reach the 10-hour threshold, you'd pay £5.

If the same employee had an overnight trip lasting 14 hours and was still travelling at 8 pm, they could claim the £25 rate in addition to the earlier meal allowances. You'd record the journey details, business purpose, and duration of travel. The employee doesn't need to submit food receipts, but your checking system should confirm they incurred a cost.

Why small businesses use per diem

For small businesses, a per diem allowance simplifies expense management. UK organisations spent £40.3 billion on business travel in 2024, according to the GBTA Business Travel Index – making cost control and efficient expense processes a priority for companies of all sizes. Here's how per diem helps:

• Reduces paperwork by removing the need for individual receipt tracking.
• Standardises payments so employees know what to expect.
• Speeds up approvals because there's no back-and-forth over receipts.
• Supports consistent cash flow tracking across the business.

Per diem types and rates

There are several ways to structure per diem rates, depending on your business needs and how often your team travels.

HMRC benchmark scale rates

These are the standard per diem rates in the UK, set by HMRC for subsistence during business travel. They cover meals and incidental expenses only, not accommodation.

You can find the full breakdown in the HMRC employment income manual. If travel spans multiple meal periods, rates can be combined up to the total that applies.

Bespoke scale rates

If your staff travel frequently and actual costs differ significantly from HMRC benchmarks, you can apply for bespoke scale rates. This involves providing HMRC with evidence of your employees' typical travel expenses over a sample period. Once approved, you can pay your own rates tax-free without needing receipts. This option suits businesses with regular travel patterns that don't fit standard benchmarks.

Overseas per diem rates

For international travel, HMRC doesn't set specific country-by-country rates the way some other governments do. Instead, you can use benchmark scale rates or agree bespoke rates with HMRC for overseas travel. Many UK businesses set their own overseas per diem rates based on destination costs and cost-of-living data. You can find guidance on HMRC's approach to overseas scale rates and the scale rate expenses for employees travelling outside the UK on GOV.UK.

In the US, the General Services Administration (GSA) publishes per diem rates that vary by city and include both M&IE and lodging. The UK system is simpler but more focused, covering subsistence for tax compliance rather than full travel costs.

Is per diem taxable in the UK?

Whether per diem counts as taxable income depends on how you set it up and whether you follow HMRC's rules.

When per diem is tax-free

Per diem payments are typically non-taxable if all of these apply:

• Payments don't exceed HMRC benchmark scale rates.
• The travel qualifies as a business trip to a temporary workplace.
• You operate a checking system to verify that employees actually incurred the costs.
• You maintain records of the travel, purpose, and amounts paid.

When per diem becomes taxable

You'll need to apply PAYE and National Insurance contributions (NICs) if any of these occur:

• Payments exceed HMRC benchmark rates without an approved bespoke arrangement.
• The travel doesn't qualify as a business trip.
• You don't have a checking system in place to verify claims.

In these cases, per diem becomes a payroll item rather than a tax-free expense. Any amount above the benchmark rate is subject to tax and NICs, and you'll need to report it through your payroll.

Record-keeping and compliance

HMRC expects you to keep evidence that supports every per diem payment. At a minimum, this means recording:

• The date, destination, and purpose of each trip
• The duration of travel
• The amount paid and the rate used
• Confirmation that the employee incurred subsistence costs

HMRC can request this information during a compliance check or PAYE audit. A checking system doesn't have to be complex – GOV.UK's scale rate payments guidance confirms you don't need to check every single receipt; sampling is acceptable. Keeping clear records protects your business and ensures per diem payments stay tax-free.

Per diem vs expense reimbursement

Choosing between per diem and traditional expense reimbursement depends on your business priorities. Both approaches have trade-offs, so it's worth understanding the differences before setting a policy.

Here's how the 2 methods compare across the areas that matter most to small businesses:

• Admin effort: Per diem uses a fixed daily rate with minimal paperwork. Expense reimbursement requires employees to submit receipts for every purchase, which means more processing time.
• Accuracy: Expense reimbursement matches actual spending, so it's more precise. Per diem pays a flat rate regardless of what the employee spends, which can over- or under-compensate.
• Speed: Per diem claims are faster to approve because there's no receipt review. Reimbursement claims take longer to verify and process.
• Tax treatment: Per diem can be paid tax-free if you follow HMRC rules. Reimbursement of actual costs is also tax-free, but you need receipts to support each claim.
• Employee experience: Per diem gives employees spending certainty upfront. Reimbursement means they pay out of pocket first and wait to be repaid.

For small businesses with regular travel, per diem often strikes a good balance between simplicity and fairness. In sectors where costs vary widely, such as construction or consulting, a hybrid approach that combines per diem for meals with reimbursement for accommodation can work well. Some businesses start with per diem for domestic trips and use expense reimbursement for overseas travel, where costs are harder to predict.

Per diem for self-employed and sole traders

If you're self-employed or a sole trader, per diem works differently. You can't pay yourself a per diem allowance in the same way an employer pays an employee. Instead, HMRC offers simplified expenses, which let you claim flat rates for certain business costs without tracking every individual receipt.

Under HMRC's simplified expenses scheme, you can use flat rates for business mileage and for working from home. For meals during business travel, you can deduct actual costs as a business expense, but you'll need records that show the business purpose, date, and destination of each trip.

The key difference for sole traders is that you claim travel costs as an allowable expense on your tax return, rather than receiving a tax-free subsistence payment from an employer. You should keep a clear record of all business travel and related expenses throughout the year.

If you travel frequently and want to reduce record-keeping, consider using accounting software to track travel expenses automatically. This makes it easier to separate business costs from personal spending and keeps your records ready for your self-assessment tax return.

Set up per diem in Xero

Setting up a per diem allowance in Xero helps you standardise and automate your process.

With Xero, you can:

• Track employee payments alongside other expenses using guides to payments.
• Monitor overall spend and cash flow using tools explained in money management guides.
• Align travel costs with your business performance and revenue tracking.

Here are the steps to get started:

1. Define your per diem rates policy.
2. Create expense categories (for example, travel, subsistence).
3. Set approval workflows.
4. Record payments consistently.
5. Keep audit-ready records.

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FAQs on per diem

Here are answers to common questions about per diem for UK businesses.

Can I pay a flat per diem in the UK?

Yes, you can pay a flat per diem as long as the amount aligns with HMRC benchmark scale rates or you've agreed bespoke rates with HMRC. You'll also need a checking system to verify that employees actually incurred subsistence costs during qualifying business travel.

What happens if an employee spends less than the per diem?

The employee keeps the difference. A per diem is a fixed daily allowance, not a reimbursement of actual costs. As long as the payment doesn't exceed HMRC benchmark rates and the trip qualifies, the full amount remains tax-free regardless of what the employee actually spends.

What is the difference between per diem work and a per diem allowance?

Per diem work refers to temporary or daily-paid employment, where a worker is hired and paid on a day-by-day basis. A per diem allowance is a fixed daily payment to cover meals and incidental expenses during business travel. The 2 terms share the same Latin root but apply to different situations.

Can directors claim per diem for overnight business travel?

Yes, company directors can claim per diem for overnight trips if the travel meets HMRC's qualifying conditions. The trip must be to a temporary workplace for a genuine business purpose, and the company must operate a checking system to verify the claim.