The Working from Home Tax Deduction – 1 Powerful Tool

working from home tax deduction

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Working from home can bring many benefits to those who can adapt to this increasingly popular way of working. From the physical and phsycological benefits that an extra half hour in bed can bring through to the cost savings of reduced travel and a few less trips to Starbucks. 

One thing we do know is that the global health pandemic has forced many people to work from home who traditionally wouldn’t have and it seems like its a trend that is here to stay with some employers drastically cutting down on office space.

Unfortunately spending more time at home usually results in higher personal expenses such as heat, light and water but thankfully there is often a way to offset some of these costs as a working from home tax deduction.

In this article we will be exploring how you may be able to benefit from the working from home tax deduction and how it varies depending on the type of employment you have whether your self employed, a limited company director or an employee operating under PAYE.

What Counts As Home Working?

HMRC don’t exactly specify an exact amount of hours that you need to be working from home in order to claim a working from home tax deduction (although some of their guidance does suggest 25 hours per month to be a reasonable level). In reality the working from home tax deductions are designed to compensate those individuals who incur additional expenses as a result of their home working situation. 

For this reason it is more important that you can clearly demonstrate and evidence the increased expenditure. Someone who works one afternoon per month from home would struggle to justify a claim whereas someone who has a room of their home that doubles up as a home office and is used on a regular basis throughout the week would have a good basis to claim on.

Self Employed Working From Home Tax Deduction

If you are self employed and you spend time working from home then you may be able to claim the working from home tax deduction in one of 2 ways. The first option is to calculate what proportion of your home expenses relate to your self employed business and include this as an allowable expense on your self assessment tax return.

The second is to use HMRC’s approved flat rate allowances which are determined based on the number of hours per month on average that you spend working from home. The end result of both is that you will declare less self employed profits and therefore pay less income tax and national insurance.

 Each has it’s benefits but as a general rule the flat rate option is quicker, easier and requires no real justification apart from an estimate of hours worked. The downside is that usually the flat rate allowance is significantly less than if you calculated the actual proportion of business related expenses. You can learn more about the self employed working from home tax deduction in our detailed article sole trader allowable expenses however we have summarised the 2 methods below.

Proportion Of Actual Costs

Under this method a self employed individual can allow for a number of home expenses including:

  • Rent/Mortgage Interest
  • Electricity & Heat
  • Council Tax
  • Internet & Telephone
Once you have totalled up the related expenses you will need to come up with a suitable way of splitting these costs between business and personal use. The most common way is to base the calculation on the number of rooms in the house. If you use 1 room of your 6 room house as a home office and work there on average 7 hours per day then the calculation would be:
 
Total related expenses x 1/6 x 7/24 = allowable expenses
 
This method can be a little more time consuming to calculate and will require you to keep detailed records of the calculation and supporting bills for 5 years following the 31 January submission deadline of the self assessment but will usually result in a greater allowable deduction when compared with the second method below.
 

Flat Rate Allowance

The second option for those who are self employed is to claim the flat rate allowance which is based on the number of hours on average that you spend working from home. The table below shows the rates that have been approved by HMRC.

It is important to note that if you work less than 25 hours per month from home then you are unable to use this method. 

This method is obviously much easier and quicker than the manual calculation discussed previously and does not require any supporting documentation to be kept (such as detailed calculations or electricity bills). The disadvantage of using this method is that as a general rule the allowable deduction is usually lower than when using a proportion of the actual costs.

Hours Worked From Home Flat Rate Allowance
25 - 50 £10 Per Month
51 - 100 £18 Per Month
100+ £26 Per Month

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Limited Company Directors

For those of you who operate via limited companies and spend time working from home the rules are slightly different. Again you have 2 options available to claim a working from home tax deduction. 

The first is to draw up a rental agreement between yourself the property owner and the limited company and then have the company make a rental payment on a weekly/monthly basis. 

The second option is to claim the flat rate allowance that is available to limited companies (this is a different allowance than the one used by self employed individuals). We have summarised how each of the 2 methods works below.

Rental Agreement

This method involves the limited company renting a space from the individual and paying a regular rent.  The rent will be an allowable expense for the limited company and will benefit the company by reducing the corporation tax liability. The rent will be treated as rental income for the individual and will be subject to the usual income tax rules.

It is very important that a rental agreement is drawn up to document this transaction officially. Without the rental agreement HMRC may reclassify the rental payments as additional salary from the company which would be subjected to both income tax and national insurance.

When preparing the rental agreement it is important to establish a suitable rental rate that is consistent with the wider market. You should not charge a rent that is designed to be tax beneficial to either party.

The best way to calculate a rental amount is in the same way the self employed use by totalling up the related expenses (electricity, council tax, rent etc) and consider the number of rooms in the house as part of the calculation. Alternatively for a more accurate calculation you could base the calculation on square footage being occupied for business use. 

The agreement should be signed by both the individual and a representative of the limited company (this often ends up being the same person acting in different capacities).

Limited company directors should seek professional advice before adopting this method as renting part of your home in this way can lead to HMRC retracting capital gains tax exemptions that normally apply to your main residence. Essentially HMRC could argue that the space used by the limited company no longer qualifies for the main residence exemption which could make you liable to pay capital gains tax on part of the property should you sell your house. 

As a minimum it is usually suggested that the room rented by the limited company is not kept solely for business purposes. If the individual also makes use of the room for non business purposes then this will lend support to claiming a greater amount of the property is exempt as a main residence. 

Again this can be a tricky area to navigate so we suggest speaking to a professional. 

Flat Rate Allowance

Another option for those who operate their businesses through limited company structures is to claim the flat rate allowance. Although this is also a rate that has been approved by HMRC (much like the self employed flat rate allowances) the rate is not the same

The flat rate allowance is currently £6 per week (21/22) and can be paid from the limited company to the individual. It will also be included as an allowable expense by the limited company resulting in a reduced corporation tax liability overall.

Importantly the £6 per week payment to the individual is not treated as a taxable benefit in kind and does not need to be taxed or declared by the individual and much like the flat rate allowance for the self employed no receipts are needed to support the claim.

 

PAYE Employees

If you are in employment and paid via PAYE then you may think that you’ve been left out but that isn’t actually the case. Even employees can claim a working from home tax deduction.
 
For employees the process is made simple as there is only 1 amount that can be claimed. The £6 per week allowance that is available to limited companies is also used for employees.
 
The best outcome for the employee is if the employer is willing to pay the employee the £6 per week directly. This payment is considered tax free and the employee will benefit from the full amount. The employer will also enjoy corporation tax relief on the £6 per week payment.
 
Alternatively where the employer does not pay the allowance directly you can claim the allowance as an employment related expense. This option is the most common as many employers do not pay the allowance. Unfortunately this option is considered less attractive for the employee as they will only receive the tax relief on the allowance. The result of this is that the employee benefits from 20%/40%/45% of the weekly allowance depending on the highest rate of tax they pay.
 
This allowance is not available to employees who choose to work from home voluntarily so if your employer provides you with a desk in the office but you prefer to and have the flexibility to work from home then you cannot claim the allowance.
 
The allowance can be backdated for up to 4 tax years so if you have been in employment and paying tax during those periods then you can make a claim for all 4 years in one go.
 
There are also many other employment related expenses that can be claimed via the same process.
 

How Do Employees Claim?

To claim the allowance an employee has 2 options:
 
  1.  Self Assessment – If the employee is already registered for self assessment then it makes sense to claim the working from home tax deduction here. Any tax saving resulting from the claim will be netted off other liabilities. There are also some situations where the employee must complete a self assessment in order to claim such as when the total claim for employment related expenses is greater than £2,500.
  2. Form P87 – This can be completed manually or online in many circumstances. . There are certain situations where you cannot use the online tool such as when you are claiming for more than 5 different jobs.

Using Multiple Rooms For Business

This situation tends to be fairly rare but certainly not impossible. Some of our ecommerce clients use 1 room of their house for storing products and another as their businesses office. On the face of it this may seem like a winning situation as potentially more of the related home expenses could be allowable for those operating through limited companies and the self employed. 
 
In reality the more of the home that is used for business purposes and the more expenses that are claimed the more likely HMRC are to investigate. As previously touched upon, in some situations this can also result in capital gains tax bills on income that would normally be exempt as a main residence.
 
 
 

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Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

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