Introducing the Relocation Allowance, an HMRC tax and social security relief for companies and employees.
But first, a disclaimer: The information we provide here is accurate to our best knowledge, but we do not cover all the details. Also, we are not a qualified financial advisor. Please consult a professional before you take any action in this area.
Should you read this article? A decision tree helper:
Do you have junior employees who move their home (nationally or internationally) to a new place within the UK to start working with you?
If you're like most companies, you are not taking advantage of the Relocation Allowance (RA), a tax break that both companies and employees benefit from when the employer pays for an employee’s relocation expenses.
Because of the rather stringent compliance requirements of this scheme, most companies only take use the RA when highly-paid executives move for work. For junior employees paid £18-25k, the cost often outweigh the benefits.
With Benivo, this situation is history.
Our platform offers a very cost-efficient, compliance-ready solution to realize savings immediately - both for existing and for new employees, no matter their salary level, and even if you currently don’t support employees financially in their relocation.
Key takeaways in this article:
- Learn how to take advantage of RA. What types of cost can be deducted up to what amount?
- Make a tweak to your compensation structure and enable junior employees to benefit from RA as well. Example - new starter Frank moving to London:
- Traditional scenario: £20k annual gross salary
- Suggested Change: £18k + £2k relocation cost reimbursements = total is still £20K. Company saves £276 and Frank saves £640 - this is like a 5% gross salary increase for Frank1!
- By making these changes (adjusting compensation to separate relocation cost; using Benivo to effortlessly realize the savings), companies can
- Potentially save a lot of money on social security.
- Gain a competitive advantage in hiring: More cash-in-hand for your employees.
Do we have your attention?
Great, let’s go a little deeper.
In the UK, there are two ways to save on tax and National Insurance (NI) when it comes to employee relocation - Relocation Allowance (RA) and Temporary Workplace Relief (TWR). In this article, we will cover RA. TWR is about expenses incurred during business travel - which can last up to two years. We discuss TWR here.
What is the Relocation Allowance?
Certain eligible cost incurred in an employee’s relocation, up to a threshold of £8,000, are not subject to NI and Income Tax.
Example: Frank (yearly salary: £18,000) is starting a new job with ACME London. He currently lives in Manchester where he graduated from university. He has relocation cost of £2,000 which the company agrees to cover.
- Frank pays his NI & taxes on £18,000 which amounts to a total of £2,593.
- However, he does not have to pay income tax and NI contributions on the £2,000 which he spent on various items in the context of his relocation.
- Had Frank received the £2,000 as part of his paycheck, he would have had to pay 20% tax and 12% NI contribution on it. Thus, Frank has saved £640.
- ACME London does not have to pay NI contribution (13.8%) on the relocation cost of £2,000. The company saves £276.
Conditions to be met:
- A new or existing employee is moving home to start or continue working for you. The new home is reasonably close to the workplace and the old one isn’t. Both domestic and international relocations qualify, as long as the destination is the UK2.
- The relocation allowance must be spent or the relocation benefits provided by the end of the tax year following that in which the relocation took place.
- Eligible are the following cost categories: cost of buying and selling a home, moving cost, cost for temporary accommodation, bridging loans and certain items for domestic use; The list is complex. Details can be found here.
- This is only valid up until £8,000 of relocation cost.
Why does this matter?
Designating a portion of compensation to an employee as Relocation Support helps a company save on tax/social security in line with current legislation and provide a cash boost to the employee to whom moving expenses are a large cost factor. Proactively helping the employee reduce their tax burden is a forward-thinking measure by the employer and sets the relationship off to a positive start.
While this is already being done for senior employees, mid-level and junior employees usually miss out on this tax benefit because they receive their relocation support in the form of a one-off bonus (which is fully taxable).
Move from paying bonuses to reimbursing relocation expenses.
One large company we work with pays £500 signing bonus to relocating employees. Another one pays £100 per month as an accommodation stipend. This is not efficient because these payments are fully taxable.
This tax burden can be reduced by simply having the employee pay these relocation cost and the employer then reimbursing them.
While the numbers seem small, they are significant for junior employees who typically earn a modest salary. Compared to the scenario in which he’d have received the £2k allowance as part of his salary, Frank wins £640. This net bonus translates into an effective 5.23% gross salary increase!3
From the company’s point of view, the savings can become very meaningful if there are many relocating employees. 100 junior employees like Frank: 100 x £276 = £27,600.
To take advantage of this tax benefit, you may need to make a few changes to your compensation structure.
Implement the following for relocating employees:
For existing employees:
If you currently offer a relocation support bonus: As outlined in Frank’s case above, change the bonus to a commitment to reimburse the employee for their relocation expenses. You won’t need to pay NI contribution on these reimbursements, and your employees won’t be paying tax on them. They simply file their expense reports, receive cash from you, and are done.
If you currently don’t offer any financial support for relocation: There’s nothing to be done in terms of tax optimisation. You can’t do what we’re suggesting below for new employees (splitting their yearly salary into a salary and an expenses portion). You can’t tell them “you’re currently making £20k - let’s change this to £18k and we will pay for your relocation expenses of £2k”. Given that the employee would have to agree to this arrangement, this would be considered by HMRC to be a voluntary salary sacrifice and therefore, expenses incurred would be fully taxable.
For new starters:
If you currently offer a signing bonus because the employee will incur relocation cost: As outlined in Frank’s case above, change the signing bonus to a commitment to reimburse the employee for their relocation expenses.
If you currently don’t offer any financial support for relocation: Break up the employee’s yearly salary into two parts - yearly salary and relocation support. Say you, based in Glasgow, hire a junior employee, Lisa, who currently lives in France, and plan to pay her a salary of £22,000. Instead, offer her £18,000 + £4,000 relocation support4. Both you and she will end up saving significant amounts:
|Salary of £22,000||Salary of £18,000 + relocation allowance of £4,000||Savings made|
|Lisa’s tax and NI due||£3,873||£2,593||Lisa saves £1,280 on tax & NI|
|Employer’s NI contribution||£1,924||£1,372||Employer saves £552 on NI|
It’s worth stressing that tax relief on relocation support isn’t available when the employer pays the employee a lump sum. Instead, the company needs to account for all individual cost items Lisa incurred during her relocation through receipts she kept. Therefore, in the salary negotiation process, you have to estimate the cost of her relocation on her behalf before offering her the salary split. Important to note here that this must not be structured as a salary sacrifice arrangement - i.e. the employee must not have the option of a cash alternative. HMRC is suspicious of such arrangements and may subsequently deny them tax exempt status.
If you have strong intakes of graduates, this will become a significant source of savings. Some of our clients have 70% of their graduate hires relocating!
→ Learn how to save even more using Temporary Workplace Relief
Working with Benivo
The reasons why companies do not designate relocation support as such when reimbursing junior employees and new starters are:
- Often, these events do not even register as relocations in the company’s accounting departments. Most companies only offer relocation packages to senior employees moving internationally, while junior employees, domestic movers, and new starters conceptually don’t even get placed in the relocations category.
- Or the benefit to the company (in James’ example £276) is not worth the associated administrative work, as the invoices for these services have to be collected and kept for three years, and the rules around which expenses qualify can be quite complex.
This is where Benivo comes in.
Benivo is a tool to provide relocation support to all employees, irrespective of salary level and seniority. Through technology, we are able to dramatically reduce the cost of a service that, in its traditional form, was so expensive so as to only be affordable for senior employees.
With Benivo, companies are now able to offer, for £499 per employee, a full suite of relocation tools to all employees and new starters.
One of the many benefits of Benivo is that we keep track of all the relocation-related expenses the employee made and keep an electronic copy of all invoices.
We clearly highlight which of the expenses are eligible for tax deduction and, that way, allow you and the employee to realize this benefit. → Benivo is your compliance-ready partner.
Let’s compare two scenarios in Lisa’s situation (reminder: Lisa makes £18,000 and the relocation cost are £4,000):
|Taking advantage of Tax Relief|
|Not using Benivo||Using Benivo|
|Employer’s tax saving for not having to pay NI on the relocation cost of £4,000||£552||£552|
|Cost to ensure tax compliance per employee (expert estimate)||-£500||- £499**|
|Full relocation support to the employee||-£1,500***|
|Total net for company||-£1,552||£53|
|Results to company|
|Tax advantage realized for self and employee?||Yes||Yes|
|Relocation support provided?||In-house, costly||Professional, low-cost|
|Admin effort to achieve tax compliance||High||Low|
* Figure quoted by a certified tax expert we consulted on the matter.
** Comprises Benivo’s complete relocation package as well as tax compliance on the Relocation Allowance.
*** Estimated cost to replicate all of Benivo’s relocation package benefits in-house.
Finally, remember when we said that you cannot give the employee a cash lump sum but that instead you have to reimburse them on their individual expenditures? One of the great things about Benivo is that you can provide a lump sum to Benivo - from these funds, we then draw on reimbursing the employee so that you don’t have to deal with this topic at all.
Because the employee does not have access to these funds as cash, it is not considered earnings and not taxable via the payroll.Summary and next steps
If you are relocating many junior employees on a regular basis and are not taking advantage of the Relocation Allowance, you are leaving a lot of money on the table, both for yourself and the employee.
However, as these savings are relatively small on an individual basis, it would be costly to keep track of these expenses on your own. Using Benivo’s compliance-ready relocation solution, you easily aggregate all the savings and keep track of the employee’s invoices. Benivo is your partner to realize these tax benefits.
Putting structures in place to benefit from tax relief will not only be a welcome cash injection but also a competitive advantage in your hiring process.
And if you think: “We don’t have a budget for this”:
In many cases (see the examples above), this will actually end up saving you money. The more you currently spend on relocation the more you will save on tax. Although we would love you to use Benivo to leverage our compliance-readiness, working with us is, of course, not a requirement to take advantage of the tax benefit. You’ll just have to set up the internal structure in-house - a one-off effort and subsequent maintenance.
1 We are using the tax rates of tax year 2016/2017. These figures may change over time.
2 There are other countries in which similar rules apply and we will update this blog post as we uncover them. So far, this article is limiting its scope to relocations within or into the UK.
3 Frank’s net pay is £15,407 (£18k gross) + £640 (tax savings) = £16,047, which is as much net pay as he would have if he were paid £18,941 gross, which is 5.23% more than £18k.
4 Of course, you can add into the contract that her second year (and onward) salary will be £22,000.
5 We are not a financial advisor and our estimate cannot be interpreted as constituting a binding commitment of any kind. It will merely be an educated calculation based on the letter of the law as to be found on HMRC’s website. You will be responsible for corroborating our calculations with your own independent financial advisor.