Are UK tax rules stifling domestic relocation?

How much does a full domestic relocation programme cost per employee? It depends on a number of factors, right? However, without knowing what those variables are, you can bet your bottom dollar / pound / euro * (* delete as appropriate) it's going to cost considerably more than £8,000, even without a Guaranteed Sale Price provision.

What's the relevance of the £8,000 allowance?

You may have read our previous post about domestic relocation taxation that touched upon the £8,000 limit, but in a nutshell or two:

There is an £8,000 (including VAT) allowance that exempts some relocation costs from reporting and paying tax and National Insurance. These are called "qualifying" costs (i.e. they qualify for the exemption) and include:

  • The costs of buying or selling a home
  • Moving costs
  • Buying certain things for a new home
  • Bridging loans

However, you need to note that these costs only qualify for the exemption when all of the following criteria are met:

  • A new employee is moving area to start a job with your organisation
  • An existing employee is changing their place of work within the organisation
  • The costs are paid before the end of the tax year after the one in which the move took place
  • The employee’s new home is reasonably close to the workplace and their old home isn’t

If any of the above do not apply, the £8,000 exemption will not apply and all costs are subject to tax and National Insurance.

For qualifying costs over £8,000, you may (i.e. probably will) have to report and pay tax and National Insurance.

If any expense is "non-qualifying", it does not fall within the above categories and is taxable regardless of the £8k limit.

Tax liability

Now, the last two points above are important as if they occur there is a tax liability to the employee receiving the benefits. No matter what you earn, you don't want to pay more tax.

Let's say a relocation package costs £19,000 from start to finish. Let's also say, for argument's sake, that all costs are "qualifying".

This crude example shows that the employee has to pay tax at their nominal rate on the £11,000 above the £8,000 threshold.

Suddenly, this relocation isn't looking too attractive to the employee.

Grossing up

To shield the relocating employee from such a tax burden, many organisations "gross up", i.e. they effectively pay the tax liability on behalf of the employee.

This is great news for the employee, but what many organisations can overlook is that grossing up is not just a question of paying the employee's tax bill - grossing up can cost the organisation significantly more than that, particularly for 50% tax payers.

Contact your tax adviser for clarification of these charges. Preferably sitting down.

Adjust the threshold

Whichever way you look at it, somebody is getting stung for these taxes, whether it be the employee or the company paying the eye-watering gross-up rate, and that's when people and organisations think twice about incurring the expenditure.

The £8,000 threshold has not changed since it was introduced so is it just me, but would it make sense for the government to either make all qualifying relocation expenses non-taxable, or at least raise the tax-free threshold to, say, £50,000?

There is no doubt that this would actually benefit companies, employees and the economy. Simple economics dictates that demand increases as cost decreases. More employees would relocate, knowledge and experience would be greater and more money would enter the economy.

Win, win.

Do you have any thoughts on this subject? Please do share them.

Stuart Beaty

Celsium, Birmingham, UK