Employee Allowances



About Allowances
Besides normal salaries and wages, you may make other payments to, or on behalf of, your workers. This section covers the most common of these and explains the tax treatment for each.

Allowances can be taxable or tax-free, and are usually paid as a result of:

  • an industrial collective or agreement, or
  • an agreement made between the employer and employees—commonly known as an in-house agreement.

Taxable allowances must have PAYE deducted, along with the employee’s wages. If you do not do this, you could be liable for the PAYE that should have been deducted, as well as penalties.

Tax-free allowances should be added to your employees’ net wages (wages after PAYE) when you pay them. Show the total amount of tax-free allowances paid in your Wage book.

You do not need to apply for IRD approval to pay tax-free allowances to your employees.

You can decide for yourself (using IRD guidelines) whether the allowance you want to pay will be tax-free or not.

To help you work this out IRD has set out the 3 types of allowances commonly paid.

They are:

  1. Benefit allowances
  2. Reimbursing allowances, and
  3. Travelling allowances.

IRD can also issue binding rulings on which allowances may be paid tax-free.


1. Benefit Allowances
Benefit allowances are payments made in addition to salary or wages, which benefit the employee. A benefit allowance is taxed with the employee’s wages in the pay period it is paid.

Food or accommodation provided to employees may also be a benefit allowance. The taxable benefit is the difference between the market value of the benefit provided, and any amount the employee pays.

Add the taxable value of the benefit to the employee’s wages each pay period, and deduct PAYE from the total.

Example

  • Market value of accommodation $150 per week
    Less rent paid $ 90 per week
    Value to be added to wages and taxed - $ 60 per week
    If the employee paid no rent, the value to be taxed would be $150 per week.

Any allowance you pay to an employee instead of providing them with accommodation is fully taxable.