As we navigate the tax year, both employers and employees need to stay informed about significant legislative updates affecting payroll and tax compliance. One major change implemented by HMRC is the complete removal of the tax relief for non-reimbursed homeworking expenses.
This guide breaks down what has changed, why the government introduced this measure, and how it impacts your business and payroll operations.
What Has Changed?
Previously, employees who were required to work from home and incurred additional household expenses (such as higher heating, electricity, or business call costs) could claim a deduction from their Income Tax directly from HMRC.
Under the administrative easement, claimants could deduct a fixed rate of £6 per week (£312 per year) without needing to provide receipts, or claim actual expenses by providing proof of expenditure.
This employee-led tax relief has been abolished. Employees can no longer claim a deduction from Income Tax from HMRC for non-reimbursed homeworking expenses.
Why Was This Change Introduced?
The government announced this measure to address widespread non-compliance and ensure greater fairness across the UK tax system. Following targeted reviews of historical claims submitted via P87 forms and Self-Assessment, HMRC discovered that over half of all claims were ineligible under the strict legislative criteria (Section 336 of ITEPA 2003). By removing the deduction altogether, the government aims to close this compliance gap and simplify tax administration.
The Financial Impact on Employees
The removal of this tax relief represents an effective tax increase for affected individuals who previously relied on the deduction to offset the costs of remote working.
The annual financial impact breaks down as follows:
- Basic rate taxpayers (20%): A tax increase of £62.40 per year.
- Higher rate taxpayers (40%): A tax increase of £124.80 per year.
- Additional rate taxpayers (45%): A tax increase of £140.40 per year.
The 4-Year Rule: Backdated Claims Are Still Open
There is an important transitional caveat that employees should be aware of. While claims can no longer be made for expenses incurred, employees are still legally entitled to make a backdated claim for the previous four tax years, provided they were legitimately eligible during those years and have not previously made a claim.
If your staff members were required to work from home during recent tax years, they can still submit these historical claims directly to HMRC to recover the relief they are owed.
Crucial Information for Employers: Reimbursements Remain Tax-Free
The most vital takeaway for business owners, HR departments, and payroll managers is that this change does not affect employer-reimbursed homeworking costs.
Under separate, ongoing legislation (Section 316A of ITEPA 2003), employers retain the ability to pay a homeworking allowance directly to their employees completely free of Income Tax and National Insurance contributions (NICs).
If you have a formal homeworking or hybrid arrangement in place where employees regularly perform their duties from home, you can choose to pay them up to £6 per week (£26 per month) through your payroll as a tax-free reimbursement. Alternatively, you can reimburse higher actual costs, provided the employee supplies valid evidence of the expenditure.
What This Means for Your Business
While this policy update does not place any direct legislative or administrative burdens on businesses, it is highly likely to introduce indirect pressures:
- Employee Enquiries: Staff members who notice a minor dip in their net tax position may look to management for clarification or ask why they can no longer claim the working-from-home allowance from HMRC.
- Review of Expenses Policies: To maintain competitive benefits and support remote staff, many employers are choosing to formalise their homeworking policies and pay the £6 per week allowance directly through their payroll.
How Hewitts Payroll Can Support You
Navigating changes to tax-free allowances and structuring employee expenses requires precision to ensure full compliance with HMRC guidelines.
At Hewitts Payroll, we can help your business react seamlessly to this tax update by:
- Setting up and managing tax-free homeworking allowances within your regular payroll cycle.
- Advising on the correct reporting procedures for employee business expenses.
- Ensuring your payroll software and processing remain fully compliant with the latest UK tax parameters.
Want to review your company’s remote working expenses or introduce a tax-free homeworking allowance for your team? Contact the experts at Hewitts Payroll today.
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