Confused about employment expenses for Limited companies? Read our guide on claiming tax relief for expenses incurred during employment.
The general rules
- Employment expenses are only deductible if the employee is obliged to incur and pay these as the holder of the employment. The expense is incurred wholly, exclusively and necessarily in the performance of the duties of employment.
- Crucially, this is stricter than the rules for trades or professions, which “only” require the expenses to be wholly and exclusively (omitting the “necessarily”).
- Expenses must not only be wholly and exclusively incurred, but also ‘necessarily’. That means the job must dictate that the expense are incurred. rather than these being incurred because the employee chose to incur them.
- The “wholly and exclusively” part of the rule intends to prevent the deduction of expenses that are private or have a dual purpose (meaning for the employment and private). For instance, this means you cannot claim expenses for normal clothing, even if you would only wear the clothes you bought solely for work.
- The general rule for deductible expenses must be incurred ‘in’ performance of their duties, and not be costs that employees experience getting into the position to do their job. An example of this would be the costs of arranging childcare, this only puts you in the position to do the job, not something that is a cost ‘in’ the job and therefore it is not deductible.
Travel and Mileage
- Travel expenses have their own set of rules. Travel expenses are deductible if they are incurred in the performance of duties, or if the travel is to a place where the employee’s attendance is necessary.
- Ordinary commuting costs are not deductible, with the exception of attendance at a temporary workplace.
- Where travel expense deductions are allowed, the employee is allowed to deduct the amount actually incurred. There is no HMRC requirement for employees to travel the most cost-efficient way, so even first class tickets are deductible.
- If an employee uses their own vehicle for travel on company business for example to attend meetings with suppliers, the employee will normally be paid a mileage allowance. Where no allowance is paid, the employee claims a deduction based either on actual costs or at the advisory rate of 45p per mile for up to 10,000 business miles in the tax year (25p/mile for subsequent miles). Where the employer pays less than this, the employee can claim a deduction for the difference.
Deductions limit
- The cap for deducting employment expenses is the amount of the earnings from the employment – this means the deductions cannot create an overall loss when they are deducted from the earnings.
Reimbursement expenses
- An employee can only deduct employment expenses when these are not reimbursed by the employer. If the employer reimburses expenses to the employee for which the employee would not be entitled to a deduction if they met the cost themselves, the reimbursement is taxable.
Working from home
Employees who are still working from home since their companies instructed them to do so during the pandemic, must meet statutory tests for these to be deductible.
Employees may only claim relief for those expenses not covered by their employer if:
- Their job requires that they must work from home
- Or their employer requires them to work from home
If the employee decides to work from home, they cannot claim a deduction for the additional costs of doing so.
In hybrid situations, relief is not available if employees have the flexibility to work from home or at the employer’s premises.
However, if they must ‘wfh’ on specific days and are not able to go to the office, expenses incurred as a result are deductible.
Employers can pay employees a tax-free allowance to cover additional costs of working from home (£6/week, £26/month, £312/year). Claims can be made at the gov.uk website.
To find out more about how to claim tax relief on employment expenses click here:
https://www.gov.uk/guidance/claim-income-tax-relief-for-your-employment-expenses-p87
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Use of this guide is for reference only. Specialist Accounting Solutions Ltd accepts no liability for any errors therein or any losses or damages arising from it.
