What is a per diem policy?
A per diem policy is a company guideline that sets a fixed daily allowance employees can spend when travelling for work.
Instead of submitting individual expense claims for meals and incidental costs, employees receive a predefined daily amount to cover eligible travel expenses.
The term per diem comes from Latin, meaning “per day”.
Per diem policies are commonly used for:
- Business travel
- Client visits
- Conferences and events
- Temporary work assignments away from home
They help organisations control travel spending while simplifying the expense management process for both employees and finance teams.
What does a per diem typically cover?
Per diem policies are designed to simplify frequent, low-value expenses. That is why they usually focus on daily costs employees incur while travelling, rather than larger bookings that are easier for companies to manage centrally.
A per diem allowance usually covers day-to-day travel costs, rather than major bookings like flights or accommodation (which are often paid directly by the company).
Common inclusions are:
- Meals (breakfast, lunch, dinner)
- Non-alcoholic drinks
- Tips and gratuities
- Local transport (e.g. taxis or public transport)
- Small incidental expenses
Some companies separate allowances into categories, such as:
- Meals only
- Meals and incidentals (M&IE)
- Full daily allowance, including accommodation
What is covered — and what is excluded — should always be clearly defined in the policy.
How does a per diem policy work?
While the exact setup can vary by organisation, a per diem policy usually follows a simple, repeatable process.
While the structure varies between organisations, the process typically follows these steps:
- Daily rate is defined: The business sets a fixed amount per day, often based on destination and cost of living.
- Employee travels for work :The allowance applies only to approved business travel.
- Per diem is paid or allocated: This may be:
– Paid in advance
– Added to payroll
– Loaded onto a company card
– Reimbursed after travel - Receipts may or may not be required: Some policies require no receipts at all, while others request proof for compliance or audit purposes.
This approach removes the need to track every small expense individually.
Per diem policy vs expense reimbursement
Although both approaches aim to cover employee travel costs, there are important differences.
| Per diem policy | Expense reimbursement |
| Fixed daily allowance | Actual costs reimbursed |
| Predictable spend | Variable spend |
| Fewer receipts | Receipts required |
| Faster processing | Slower approval cycle |
| Less admin | Higher admin workload |
Many companies use a hybrid model, combining per diem allowances for meals with traditional reimbursements for larger costs.
Per diem rates: how are they determined?
Setting the right per diem rate is important for fairness, compliance and employee trust. Rates that are too low can create frustration, while rates that are too high may raise tax or audit risks. A clear, consistent approach helps employees feel confident about spending and gives finance teams a defensible framework.
Per diem rates are usually based on location and local cost of living.
Common approaches include:
1. Government benchmark rates In several countries, official bodies publish recommended per diem rates, such as:
– HMRC benchmark rates (UK)
– GSA per diem rates (US)
These rates are often used as a compliance reference point.
2. Internal company rates Some organisations set their own allowances based on:
– Historical travel data
– Budget constraints
– Travel frequency
– Seniority or role
3. Tiered destination rates Higher allowances for expensive cities and lower rates for cheaper destinations.
Whichever approach is chosen, consistency is key.
What should a per diem policy include?
A clear per diem policy should outline:
1. Eligibility
– Who qualifies for per diem?
– Does it apply to contractors or employees only?
– Minimum travel duration (e.g. overnight stays only)
2. Daily allowance amounts
– Domestic vs international travel
– City-specific or country-specific rates
3. Covered expenses
– Meals
– Incidentals
– Local transport
– Exclusions (e.g. alcohol, entertainment)
4. Payment method
– Payroll
– Company card
– Reimbursement
5. Receipt requirements
– No receipts required
– Receipts required above a threshold
– Receipts required for audit only
6. Tax and compliance guidance
– How per diem is treated for tax purposes
– Reference to local regulations
Clear documentation reduces confusion and prevents disputes later.
Spending the time to be clear upfront helps avoid questions, exceptions and disagreements once travel is under way.
Benefits of having a per diem policy
- Predictable travel spending – fixed allowances help finance teams forecast costs more accurately.
- Reduced administrative workload – fewer receipts and faster approvals free up time for both employees and finance teams.
- Improved employee experience – employees know exactly what they can spend, without worrying about claim rejections.
- Stronger policy compliance – clear rules reduce inconsistent spending and grey areas.
- Faster month-end close – simplified expense data supports smoother reconciliation and reduces last-minute surprises for finance teams.
Common challenges with per diem policies
Most per diem challenges stem from limited visibility and unclear controls, rather than the allowance itself.
While per diem policies offer simplicity, they also come with potential risks if poorly managed.
- Over- or under-spending: Fixed rates may not always reflect real costs, especially in fluctuating markets.
- Lack of visibility: Without proper tracking, finance teams may lose insight into how allowances are actually used.
- Inconsistent application: Different interpretations across teams can lead to compliance issues.
These challenges can be mitigated with clear rules and modern spend management tools.
Best practices for implementing a per diem policy
To ensure your policy works in practice:
- Align the policy with local tax regulations and compliance requirements
- Communicate rules clearly before travel begins, so expectations are set upfront
- Review rates annually to reflect inflation and travel trends
- Use digital tools to track per diem spending
- Combine per diem with company cards for better visibility
A policy should support employees — not create friction.
Example of a simple per diem policy
This example is for illustration only. Allowance amounts should be adjusted by location, cost of living and, where relevant, role or seniority.
– Daily allowance: £40 per day
– Applies to: Approved overnight business travel
– Covers: Meals and incidental expenses
– Excludes: Alcohol, client entertainment, personal purchases
– Receipts: Not required unless requested for audit
– Payment method: Company card or payroll reimbursement
This type of structure keeps guidance clear while remaining flexible.
Final thoughts
A well-defined per diem policy helps businesses balance cost control, compliance and employee experience.
By setting clear daily allowances, outlining eligible expenses and maintaining transparency, organisations can reduce administrative burden while supporting employees when they travel for work.
In practice, per diem policies are most effective when paired with clear controls and real-time visibility. This gives finance teams confidence, reduces month-end surprises and ensures simplicity for employees does not come at the expense of oversight.
