Housing allowance

What it means

A housing allowance is a financial contribution that an employer may, under the Labour Code, give an employee towards the cost of renting accommodation at the place of work. It is intended for employees who have moved far from their permanent home for the job and is meant to make it easier to recruit people into regions short of labour.

The law ties the allowance to several criteria: the employment must have lasted a certain time, the distance between the workplace and permanent residence must exceed a statutory threshold, the employee must not own housing at the place of work and must not at the same time receive accommodation reimbursement, for example as travel expenses. The allowance is paid towards rent actually paid.

If the conditions are met, the allowance is exempt from income tax up to a statutory cap and is not subject to contributions. The cap and other parameters can change, so always work from the current wording of the Labour Code and the Income Tax Act.

How it works in practice

The allowance suits companies recruiting specialists from other regions and complements other employee benefits. Before introducing it we recommend setting out rules in an internal policy: who is eligible, how much, what documents are needed and what happens when employment ends.

The employee submits the lease agreement and proof of rent paid, such as a bank statement. The employer pays the allowance with wages and records it as exempt income. The documents must be kept, since in an audit the company has to prove every condition was met for each month.

In a cafeteria benefits system the housing allowance can be one of the options, but care is needed not to lose its special character. If the statutory conditions are not met, it is ordinary taxable income subject to tax and contributions and must be processed that way in payroll.

What to watch out for

The most common mistake is paying the allowance to employees who do not meet the conditions, for example because they have not been employed long enough or live closer than the law requires. In an audit by the Social Insurance Agency or tax office, contributions, tax and penalties then have to be paid. Eligibility must be checked for each employee individually.

Watch for overlap with a posting or long business trip. If the employer pays the employee's accommodation as a travel expense, a housing allowance cannot be paid for the same period. Two claims for the same accommodation is one of the first things inspectors check.