Paying Employee’s Relocation Costs without Creating a Tax Liability

Employer’s sometimes pay a certain amount of money to their existing employees or a new candidate joining the company for relocation costs from one place to another. The relocation cost may be applicable when they are recruiting a new employee at a senior level or with specialised skills and relocate him to the new place to start a job or request an existing employee to take transfer and move to a new location along with the home they are living in.

The tax-free limit of £8,000 was set by HMRC in 1993 which remains unchanged till now, but the relocation costs have grown significantly and reached a high level. The expenses & benefits paid by the employer in relation to relocation cost depends upon how much you want to retain an existing employee or hire a new employee to work for you.

In order to claim exemption from the relocation costs and to save yourself and the employees from the tax liability, you need to understand what expenses & benefits qualify for tax free relocation costs exemption limit of £8000.

In case you cross the tax-free exemption limit of £8000, you are bound to pay taxes on relocation cost of an employee. There are some criteria mentioned below which you need to meet in order to take exemption from reporting and paying tax & national insurance.

You can only qualify for exemption up to £8000 in the following situations –

• When a new employee starts a new job and moves from his place to the work place.
• When an existing employee moves from one work place to another within the organisation.
• When an employee’s new home is reasonably close to the work place.
• When an employee’s old home is not reasonable close to the work place.
• The relocation cost must be paid before the end of the tax year but after the year in which employee started their job.

Note – You need to report and pay tax as well as national insurance to HMRC in case relocation cost exceeds £8000.

Tax free & taxable relocation expenses & benefits

S.NO	RELOCATION COSTS EXEMPTED FROM REPORTING	RELOCATION COSTS REPORTABLE TO HMRC
1	Cost incurred on disposal of existing home either owned or rented or proposed disposal by paying fees to estate agent, any legal person or disconnection of utility services etc.	Payment of mail service redirected from old to new residence. Paying council tax bills for the previous residence, house cleaning on sale.
2	Cost incurred on acquiring new home or elimination of proposed acquisition with no fault of the buyer such as Land registry cost, mortgage cost, indemnity premiums and survey fees.	If the employee moves to an area carrying high cost, mortgage or housing subsidies are offered to employees. It also covers compensation given to an employee for any loss faced by him on the sale of previous residence house, House cleaning on purchase.
3	Cost incurred on moving of house hold things and furniture such as Packing & unpacking of furniture and other household things, temporary storage facilities etc.	Cost incurred on purchase of uniform for admission of employee’s children’s in the new school. It also covers cost related to redecoration of the new house or starting a new garden.
4	Travel & living cost which includes temporary living accommodation (hotel and/or rented property used by the employee until the home is purchased)	Compensation for losses in case penalty levied on incomplete notice provided by the employee in school for child’s withdrawal or cost of joining a new club.
5	Replacement of old home items with the domestic goods as they are not suitable for use in new home such as carpets, curtains, white goods.	Any help taken by the employee to find a new job for the spouse or civil partner. It also covers compensation for loss of future earnings.
6	Interest payments on bridging loans but for this you need to meet certain conditions. For ex – Disposal of interest in the old house.	Any interest payments for the mortgage on employee’s existing house (Maintained or rented out)

In order to claim tax exemption, the name of the relocation place must be specified by the employee as it sets miles and helps in measuring the accurate distance from the work place; otherwise it is very difficult to measure the distance.

In order to avail tax relief, there is no need for an employee to sell his or her old house. It can be rented out and you can easily avail the relocation exemption after acquiring the new residence with your family.

Let us understand this with an example below –

An employee starting a new job on 15th March 2019 will have to use the tax free limit of £8000 until 5th April 2020 whereas if an employee starts a new job on 18th May 2019 (2 months later), he or she will have to use the tax free limit of £8000 until 5th April 2021. Relocation may be delayed in some exceptional cases such as old home not sold or waiting in order to complete the child education.

How to recover relocation costs successfully?

Relocation costs can be recovered in case you are not sure whether the employee will remain with the organisation for long term or not (as depicted from his or her previous employment history). It is a sensible option to add a 3 years employment clause in the employment contract of the employee which states that if employee after relocating to another location leave the company without completing 3 years, employee need to payback a proportion of the relocation cost to the employer. Let us understand the same with the table given below –

Relocation Payback Table

Service period	Repayment amount
If employee leaves company within 6 months	100% of the costs
If employee leaves company between 6-12 months	75% of the costs
If employee leaves company between 1-2 years	50% of the costs
If employee leaves company between 2-3 years	25% of the costs

Note – In case the relocation is cancelled and employee does not changed his or her main residence location, any reimbursement of expenses or benefits offered in relation to the cancellation of relocation will not be entitled for tax exemption.

The above mentioned information not only helps employer in managing the relocation cost but also saves you from the tax liability which you have to pay on relocation cost if your amount exceeds the tax free limit of £8000.

Pay the relocation cost within exemption limit and save yourself from the tax liability

Also Read: Relocation Expenses and benefits - Relocation Allowance

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