Tax free expenses under employee homeworking arrangements

If your office is far from an employee’s home, you can make payments to an employee under ‘homeworking arrangements’ for reasonable household expenses without any tax liability arising, so they will not need to pay national insurance or income tax on them.

Offering the option for your employees to work from home can make you an attractive employer, and it also means you can draw from a wider pool of prospective candidates who live further afield.

What are ‘homeworking arrangements’?

‘Homeworking arrangements’ are agreed between employees and employer, but they must work from home for a qualifying reason, for example because the equipment they need is not available at your workplace, or their work means they have to live too far away from your workplace to travel there every day.

The arrangements must be regular, i.e. frequently or following a pattern. HMRC would accept an employee working one day a week from home, even if the day of the week varied. The work can be done in any area of the home, so they do not need to have a separate study.

Expenses are not allowable if an employee decided to take work home in the evenings, as this would be classed as an informal arrangement.

What are ‘qualifying expenses’?

HMRC’s definition of qualifying household expenses are those that are connected with the day to day running of the house, for instance, additional utility bills, metered water use, internet access, home insurance or telephone bills. HMRC do not allow for a proportion of household fixed costs that would be the same whether the employee were at home or not, such as mortgage interest, rent, council tax or water rates.

If a broadband connection or landline had been installed before the employee started working from home, then this would be an existing expense and would not be reimbursed tax-free. If a line had been connected specifically for the job, then it would qualify as an additional cost that the employer could reimburse.

If the employer provides office equipment and office furniture, these would be classed as tax-free benefits in kind.

How much can be paid?

Currently, employers can pay up to £4 a week, which equates to £18 per month or £208 per year, without supporting evidence. Supporting evidence will be required if an employer pays more than that amount, to show that the payment is wholly in respect of additional household expenses carried out while working from home.