If you are an employer you may have had an email recently about a tax relief available to your employees for home working or you may be aware of the ability to pay them a tax free allowance for home working.
These two options are actually alternatives and in this blog post I’m going to clarify what your options are – as well as consider some of the advantages and disadvantages.
The latest guidance (as at 20th October 2020) appears to be that at least for this financial year the figure is payable for the whole year. This is regardless of the proportion of the year your employee has been required to work from home.
This means it is relevant for almost all businesses (and charities) who have sent staff to work from home during Covid.
There are two options, as an employer you can pay an allowance to your employees or you can alert them to update their tax codes to reduce the tax they will pay.
Option 1 A – Pay your employees £6 a week tax free
Under this option you pay your employees an additional amount of £6/week. You don’t require a receipt for this, and there is no tax to pay. Effectively this appears as a normal business expense. You may wish to pay this to your employees (including Directors who are employed) in recognition of the additional costs they are incurring.
Advantages: simple; motivational for your employees, no negative tax implications for you or your employees
Disadvantages: An additional cost to your business
Options 1 B – Pay your employees for costs incurred
A variation on the first option is you could pay your employees for the actually additional costs they incur for amounts they can demonstrate or show they have incurred. This may be relevant for an employee who has incurred substantial additional expenses. This is more complex as you need receipts or other proof of what these costs are. Again, this counts as a normal business expense. You may wish to pay this to your employees (including Directors who are employed) in recognition of the additional costs they are incurring.
Advantages: motivational for your employees, no tax implications for your employees
Disadvantages: An additional cost to your business, potentially complex and administratively complicated.
Option 2 – alert your employees to tax relief
If you don’t want to go with option 1 you should alert your employees to the tax relief they can claim.
Note that this tax relief is offered to workers provided they were told by the employer, rather than chose, to work from home. It also is only available if they have not received home expenses payments directly (i.e. you haven’t gone for Option 1).
There are some specific rules that the employee must check.
Note that employees won’t get back the full cost of the extra expenses, only tax relief on the total. For example if employees can show £500 of extra costs, as a basic rate taxpayer they will see net wages increase by £100.
Advantages: No cost to the business, potentially very straightforward
Disadvantages: None that we can see, but you may feel you are missing out on an opportunity to reward your employees in a tax free way
How employees can claim
If employees go for the easy, no-receipts-required route, they get an adjustment on their tax code. The claim will be based on the assumption that they have incurred costs of £6 a week while working from home. The employee then gets back the tax that they would have paid on that sum.
Employees who have incurred significantly higher costs have two options. They can claim up back expenses up to maximum £2,500, either by claiming
- through their self-assessment
- by submitting a P87 form
Employees will need their employer’s name and PAYE reference (which will be on the payslip or P60), and job title. They will have to demonstrate these extra costs and back them up with receipts.
We believe most people will probably decide that the £6 a week, no-receipt claim is the easier option.
The application can be found here: https://www.gov.uk/tax-relief-for-employees/working-at-home
If you are a Holy Brook client we can help you or your staff with the administration for this. We also recommend getting in touch to sign up for our free newsletter to ensure you don’t miss out on tips like this