Since 2003, employers have been able to make tax-free payments to help employees cover reasonable additional expenses incurred as a result of working from home. In this month’s back to basics, we take a look at the conditions which must be met to enable you to make tax-free reimbursements to employees who are spending all or part of their working time at home.

Which employees are eligible?

To be eligible, the employee must be carrying out some of the duties of their employment under homeworking arrangements. This means that the employee is regularly performing some or all of their duties at home.

HMRC will accept an employee is working at home regularly where homeworking is frequent, or follows a pattern, such as working at home for two days of every week. HMRC will still consider it to be regular even if the employee varies the days on which they work at home each week. Employees don’t have to work from home every day, so hybrid workers who may only be working at home for part of the week can still quality for the payment.

Working at home informally does not count as homeworking. For example, taking work home in the evenings will not qualify the employee for tax-free reimbursement of costs. Instead, there must be an arrangement that the employee will work at home and not at the employer’s premises, and it is good practice for this to be in writing.

What’s it worth?

Since calculating the additional costs of homeworking can be difficult, where the conditions are met, HMRC allow employers to pay a fixed amount of £6/week for weekly paid employees or £26/month for monthly paid employees without the need to keep evidence of additional costs.

These flat-rate amounts apply equally to part-time or hybrid workers and it is not necessary to pro-rate them where the employee does not work at home full-time.

Can I pay my employees more?

The fixed rates above have been set by HMRC for administrative convenience as it can be difficult to calculate the extra costs arising from homeworking. If this is not appropriate, then a larger tax-free amount can be paid provided the additional costs can be evidenced. There are two approaches to take. 

The first option is to calculate the average additional costs of working at home and agree an appropriate rate with your employees. HMRC provide an example of how to do this. It is possible to agree to increase this rate annually. Once the rate has been established, employees are not required to keep subsequent evidence of costs.

Alternatively, the employer can reimburse the actual additional costs incurred by the employee. This means that the employee needs to provide evidence of their actual costs. Allowable costs include:

• additional heating and lighting costs
• additional insurance
• metered water
• telephone or internet access charges
• business rates (if applicable)

Only the increase in costs incurred by the employee as a result of working from home can be reimbursed. Fixed costs that do not increase as a result of working from home cannot be included. Such costs might include:

• mortgage interest or rent
• council tax
• water rates

For costs such as broadband internet connection or domestic landline, it’s important to identify additional costs. If the employee is already paying for a connection before they start working from home then this is an existing expense and cannot be reimbursed tax-free. If a new connection is needed to work from home, then this would qualify as an additional cost which the employer can reimburse tax-free.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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