What is tax relief for working from home and how to check if you qualify for it.
Many of us had to work from home during this pandemic especially during the first lockdown from March- August 2020 and then in January-February 2021. Although working from home saves money on travel and maybe even lunch, it increases the household costs like lighting and heating etc. Other expenses related to working from home, for example buying a desk, chair, computer and printer can also be claimed. To claim these expenses, evidence of payment and justification for expenses is required by HMRC. However, an amount of £6 can be claimed without any proofs.
There are two ways employees can get a compensation for working from home.
1. Employers: Employees should ask their employers to pay for those expenses which they incurred while working from home. However, there could be tax payable on such benefits received from employers. But employers can pay their employees up to £6 per week on top of their salaries to compensate them for working from home without any tax implication. If this option is chosen, then employees can earn extra up to £312 per annum tax free.
2. Tax relief: If an employer does not pay its employees any extra money for working from home, employees can claim a tax relief on their actual salary, assuming the £6 received in salary were paid for working from home. Hence tax should not have been deducted on those £6 as that amount is tax allowable.
Let’s take example of two employees, first one earning £30,000 and second one earning £60,000. Normally employees would not be allowed to deduct any expenses and only personal allowance will be deducted before tax calculations. Personal allowance for the year financial year 2020-21 is £12,500. After deducting personal allowance, we will get the figure for taxable pay on which the relevant tax rates would be applied. Employee earning £30,000 would only be taxed at a rate of 20% hence his total tax payable would be £3,500. Second employee who is earning £60,000 would pay tax at 20% on the 1st £37,500 and the rest of the salary (£10,000) would be taxed at 40% giving a total tax of £11,500.
Let’s bring in 2 different working from home scenarios into the life of these two employees.
Scenario 1 – Employer pays extra £6 for working from home
Let’s say these two employees were told by their employer that they had to work from home for the whole year (52 weeks). Employer would be paying them their gross salary of £30,000 and £60,000 plus £312 (£6 x 52 weeks) per annum as a compensation for working from home. Hence the gross Income from employment would be £30,312 (£30,000 plus £312) for first employee and the £60,312 for second employee. However as £312 is an allowable expense, the taxable salary would be £30,000 and £60,000. The tax payable for both employees would be as originally however they have received £312 extra in this scenario.
Scenario 2 – Employer doesn’t pay extra for working from home
In this scenario, employer does not pay £6 per week (£26 per month) to its employees. They received exactly the same amount as they received originally and paid same amount of tax. However, they can claim from HMRC that tax should not have been deducted on part of the salary amounting £312 as it was deemed to be paid for working from home and should be refunded. This means employee earning £30,000 would get a refund of £62.4 and second employee earning £60,000 would get a refund of £124.8.
As can be deduced from the above discussion, It is more beneficial for employees if employer pays them additional £6/week for working from home as this way an employee can make an extra £312 per annum. However, in case of tax relief employee would get a refund of only 20% or 40% depending upon which tax rate band their salary falls.
During the first lockdown it was announced by HMRC that this relief should be claimed for the weeks in which employees were required to work from home. However, in January 2021, during the second lockdown, HMRC has announced that employees can claim this relief for the whole 52 weeks.
The obvious reason for this is the difficulty in verifying the number of weeks employees would be claiming in this uncertain and fluid situation which could take away the simplicity of allowing £6 per week tax relief without any need for justification and evidence and to reduce the paperwork.
Check you can claim for this relief on GOV.UK
https://www.gov.uk/tax-relief-for-employees/working-at-home
This article is written by Raja Mizan ACCA, director of RMR Accountants & Business Advisors and also a senior lecturer in a UK university.