There’s more than one way to compensate your staff tax and NI free for costs they incur when they work from home. The rules for each are quite different but is one more generous than the others?
Despite the existence of three separate tax and NI exemptions, HMRC seems to try it’s hardest to make it difficult for employers to recompense their staff for homeworking costs they incur. While each exemption works differently, there’s a fair degree of overlap which you can use to your advantage.
Fixed rate allowance
This exemption is the simplest. It’s readily accepted by HMRC, probably because it’s not very generous. It allows you to reimburse an employee for ‘additional’ household costs resulting from working at home. In practice, HMRC accepts that there will be additional household costs, eg higher energy bills but caps the amount you can reimburse tax and NI free to £4 per week. The key points for the exemption are:
- there must be an agreement between you and the employee (although it needn’t be written) confirming they can work from home
- the employee must work regularly from home. This doesn’t mean all the time, but there must be a pattern, say one day per week.
- there’s no requirement to justify how much additional expenses were actually incurred.
The second exemption allows you to provide and pay for goods and services at an employee’s home so that they can work there. Unlike the first exemption, there’s no need for them to work regularly from home or for there to be a formal agreement. Even where the employee gains a personal financial benefit from the goods or services, no tax or NI charges arises as long as private use is ‘not significant’. HMRC’s view of what counts as not significant is quite generous, which means employees can get some real tax and NI-free advantage from this exemption. The key points for the exemption are:
- there’s no financial cap
- the employee must have a genuine need for the goods or services so they can do their job
- you must pay for the goods and services and be contractually liable for their cost. For example, a broadband contract must be in your company’s name even though it’s provided at the employee’s home.
Tip. The exemption can apply to, say, office equipment, eg a desk, chair, computer, etc. as well as services like phone and broadband.
General exemption for job expenses
The general exemption for job-related expenses can apply, HMRC is resistant to it being used for homeworking costs. You can only pay or reimburse an expense tax and NI free where you are satisfied it was incurred ‘wholly, exclusively and necessarily’ by an employee in the course of doing their job. The keys points are:
- there’s no financial cap or restriction on what it can apply to
- no homeworking agreement is needed.
Tip. You can use a combination of all three exemptions to make tax and NI free payments as long as they don’t relate to the same costs.