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How to relocate a new employee tax efficiently
2 July 15 | By: Jas Jhooty
Your new employee is relocating from another part of the country. The good news is that they can take advantage of a special tax break, but they’ll need your help to get it. This article explains how can you turn the situation into a tax and NIC saving opportunity for both you and your employee?
You have a limited budget with which to pay your new employee a gross salary, so you think of sweetening the offer with some tax-free benefits that boost the total value of their remuneration package.
You may not have thought of using another tax-efficient benefit that is worth up to £8,000, assistance with the employee’s costs of relocation. If your new employee lives more than a reasonable commuting distance from your offices (their new workplace) before they take up their new job, and moves to a new home which is within a reasonable daily travelling distance of the workplace, you can reimburse them up to £8,000 of their relocation costs.
What does it cover?
Moving house is an expensive business these days, as the cost of packing and transporting furniture and belongings alone can top £2,000. Disposing of the old property will involve estate agent’s fees, and possibly a bridging loan to cover the mortgage while the property is on the market. The new property may well require new curtains and carpets, and some utility companies charge connection fees. You can reimburse all of these costs for the new employee when they supply you with receipts as evidence of their expenditure, although only the first £8,000 of the moving expenses will be tax free.
What’s it worth?
If your new recruit had to meet £8,000 of their relocation costs out of their taxed income they would need to receive gross pay of £13,793 (assuming they are a 40% taxpayer and pays 2% NIC: £8,000/58%). To provide them with £13,793 of income you must pay a further 13.8% in employers’ NI, so the total payroll costs to cover the relocation expense amounts to £15,696 (£13,793 × 1.138).
The relocation costs must be reimbursed to the employee by the end of the tax year that follows the year in which they take up their new job. So if your new employee starts working for you on 1 November 2015 they must claim their relocation expenses by 5 April 2017.
Your tight budget for the new worker may not stretch to paying out expenses of £8,000, so why not compromise and set the starting salary in year one at say £50,000 plus £8,000 of tax-free relocation costs. Then in year two the salary is increased to the agreed level of £58,000. In this way the employee saves tax and NI of £5,793 and you save £1,903 in employers’ NIC. The employee is also happy because a large chunk of their relocation costs are covered. It’s a form of salary sacrifice that benefits both of you.
Think laterally when designing a remuneration package to attract a key employee. Many tax-free benefits can be used to reduce their gross pay but which are worth a lot to the recipient.
How emTax can help
As specialists in employment tax, our consultants can advise you on how to put tax efficient remuneration policies in place.
For advice on this or any other employment tax matter, please do not hesitate to contact us.