Practical guide: making working from home tax efficient

Changing landscape

Working from home became a necessity during the pandemic, and now many employers provide the option of working from home, where the job allows for it.

To enable employees to work effectively from home, employers have been covering the costs of office equipment - monitors, keyboards, and approved desk chairs, to name a few. On top of this, employers have been making payments to help cover the additional household expenses incurred by employees due to working from home.

An employer wants to maximise tax and NI efficiency when covering such costs going forward. So how can they do this?

Exemption for expenses

There is an exemption, under s.316A Income Tax (Earnings and Pensions) Act 2003 (ITEPA) , for payments made  to employees to cover the additional household expenses incurred as a consequence of working from home, meaning such payments can be made with no tax or NI consequences.

In order for the exemption to apply, the employee must be working at home under a homeworking arrangement. This will be the case where the employee works from home regularly under agreement with the employer.

Household expenses

“Household expenses” means expenses connected with the day-to-day running costs of the home. Typical household expenses include heating, lighting, water and internet. It should be kept in mind that the exemption only covers additional costs for working from home - so if the cost is the same regardless of whether the employee works from home, it will not be eligible.

Insufficient amount

It is likely to be difficult for the employer and employee to calculate the exact additional household expenses being incurred for working from home, although possible. HMRC would expect records to be retained to show how amounts were calculated.

To compensate for this difficultly, HMRC allows employers to pay £6 per week (or £26 per month) to employees working from home under a homeworking agreement, without having to justify the amount or keep any records per EIM01476.

In practice, it may transpire that £6 per week is insufficient to cover the additional costs. The employer can agree a higher rate with the employee that is calculated to do no more than reimburse the average additional costs. HMRC provides an example at EIM01478.

HMRC accepts that for the 2020/21 and 2021/22 tax years, the employee automatically meets the homeworking arrangement criteria for the year as long as they worked at home for at least one day in the tax year due to the pandemic. The employee can be paid the full £312 (£26 x 12).

The employer can incorporate the £312 for employees that work at home under a homeworking agreement into their remuneration package. So instead of providing a pay rise of £1,000, they could provide a pay rise of £688 plus a homeworking allowance of £312, for example.

Expenses incurred for employment

The s.316A exemption only applies to payments made by the employer. If the employee works from home, then they may be able to claim tax relief from HMRC, under a s.336 ITEPA deduction. This means they can deduct it from their taxable earnings, either on the tax return or via a Form P87 (for claims not exceeding £2,500).

The problem is that the additional household expenses must be incurred wholly, exclusively and necessarily in the performance of the work.

This condition is notoriously difficult to meet, but HMRC accepts that the criteria are met if the employee has to work at home due to the pandemic in the tax year. As with the s.316A exemption, the £6 per week or £26 a month can be used for the value of the additional expenses, and for the 2020/21 and 2021/22 tax years, so long as the employee worked at home for at least one day in the tax year, the employee can claim the full £312 for the year.

If the employee has worked at home in weeks where the employerhas made no payment to them, then they can claim a deduction for those weeks (all the way back to the start of 2020/21). The employer can send the employee to the HMRC claim page to do this.

Example. For a basic rate taxpayer, the tax relief for a full year would be 20% of £312 which is £62. For a higher rate taxpayer, it would be 30% of £312 which is £124.

Equipment

An exemption exists, in s.316 ITEPA , for the provision of home-office equipment (including furniture). To qualify private use needs to not be “significant”, and it needs to be provided for the sole purpose of enabling the employee to work from home.

HMRC accepts that there is no significant private use wherethe employer's policy about private use is clear and any decision by them to not recover the costs of private use is commercial, for example, because it is impractical.

To substantiate that the exemption applies, the employer should document its policy in line with the above, and provide this to the employee to read and confirm understanding.