A tool allowance is a payment toward the tools or equipment an employee must provide to do their work, common in trades. Like other allowances, its tax treatment depends on whether it is a flat amount or a reimbursement.
What it means
A fixed tool allowance is generally taxed in full as remuneration, since it is paid regardless of what the employee actually spends. Where the employer instead reimburses the proven cost of required tools, the treatment can differ. The common case - a regular flat amount - is taxable pay.
Where it fits in
A tool allowance is an earnings component included in gross remuneration, taxed like a general allowance when it is a flat figure. It is grouped with other tool-of-trade allowances and reported under the relevant IRP5 source code.
Key rules
- An amount toward tools or equipment needed for the job.
- Generally taxable in full when paid as a flat allowance.
- Reimbursement of proven cost may be treated differently.
- Reported under the prescribed IRP5 source code.
