Escape from the daily rush-hour commuting and office politics, Flexi work hours, comfy clothes, work from home is a dream come true but, did you know it does cost you a lot?
The perks of working from home are not an element of a surprise today. It is pretty much known to everyone that working from home means a truckload of benefits, but surprisingly, there are downsides that hardly anyone notices. Working from your favourite couch in your comfy clothes while listening to your playlist and sipping a cup of coffee, there’s your electricity, gas, water, coffee, etc. that are getting used up for the work, and you are paying up for that.
Just because you don’t have a registered cubicle on a commercial plot with a couple of staff under you, doesn’t mean you are not eligible for tax benefits. You can save up a lot; all you need to know is the rights of being self-employed.
It may be your home, but it’s a work environment while you are doing your job, which means the electricity, telephone calls, data pack, and other such utility bills of yours can be claimed. But, before you go crazy over your Wi-Fi usage, let us make it clear that the tax-deductions for all of the above are allowed strictly for business purposes and not personal.
Now, expenditures vary depending upon the work you do, the designation you have, and household items you utilize for work. For example, the HMRC rules for tax deductions are different for the self-employed than the directors of a limited company. So, let’s peek into what each can claim and how?
Expenses a self-employed can claim
Being an independent working individual or a sole trader in the UK means that if you are trading on your own through an unincorporated business, you are qualified to claim the following;
Home-office expense – The space of your house, exclusively used for work purposes is eligible for a tax deduction. The size of the area in your home that you use as ‘office’ in relation to the whole property is calculated. A portion of rent or mortgage interest, depreciation, taxes, etc., falls under home office deduction which can be claimed.
Equipment used – Your laptop/computer, printers, other tools, and supplies required for your work are also tax-deductible.
Travel bills – If you are required to use your wheels for business purposes, you can deduct the cost including the mileage and depreciation.
Utilities – A proportion of gas, electricity, water, and other basics utilised while carrying your work can be deducted.
Telephone and internet – Hold your horses, as the data you spent on your social media cannot be claimed, instead, the calls you made to the clients, emails, and messages sent, all can be reimbursed.
Council tax – Yes, you heard it right. A proportion of your council tax can be claimed depending on how much you use your home for business.
Repairs and maintenance – If the ceiling of the work area in your home needs a repair, you can easily claim that by adding the cost of it into your business accounts. Any area other than that cannot be covered.
How to claim?
Sole traders can achieve tax relief via two methods – Simplified expenses or Fair proportion of actual bills. The simplified process uses a flat rate depending on the number of hours you work from home each month. To qualify, you must fulfil a minimum of 25 hours of work in a month. The following are the allotted rates for the business hours you complete.
Hours of business/month Flat rate/month
25 – 30 £10
51 – 100 £18
101 + £26
But, please note that the flat rate covers all household goods and services, food and drink and utility bills, but not mortgage interest, rent, council tax or rates.
The other method is a bit lengthy road but can give you a higher expense amount, which means you can save more. It is calculated by dividing your bill by the number of rooms you use for business or the amount of time you spend working from home. For example, if you have a total of three rooms in your home, among which one you use as an office, and you received a bill of £700 for gas and electricity. The bill is then divided, assuming all the rooms used equal amounts of gas & electricity. Therefore, you get £700, divide by 3 = £233 which is further divided by 7, i.e. (days of the week) which makes £33.29 and then times this amount per day by the number of days you used this room for business purposes, i.e., £33.29 x 5 = £166.45. Similarly, you can calculate each bill and sum them up to get the total Use of Home amount to include on your tax return.
Apart from these, pensions, medical insurance, eye tests, professional subscriptions, accommodation, charitable donations, training, etc., are the other expenses that can be claimed.
Expenses a limited company can claim
Although a majority of expenses are as same as sole traders, there are several other tax-free benefits for limited companies. If you are a director of a limited company working from home, you are entitled to claim £4 per week without receipts for home expenses under the HMRC’s flat-rate amount allowance. Alternatively, the company can reimburse you for light and heat, but cannot do the same for mortgage interest or council tax.
Some of the business equipment, like a computer, mobile phone, etc., in the company name, is already tax-free.
You, as a director of a limited company, can also claim your home-office expenses by creating a rental agreement between you and your limited company. Make sure to prepare a proper formal agreement, or you will invite a risk of HMRC classifying your rent as an additional salary. With a rental agreement, you can deduct rental payments from your company’s pre-tax profit, meaning that Corporation Tax will not be payable on these expenses.
Drawing up a rental license between you and your own limited company is considered to be beneficial in many ways. However, to make the most out of it, there are a few things to bear in mind before bonding yourself to the company with a piece of paper. They are;
- Before drafting such an agreement, seek the help of a professional and a local estate agent to discuss and justify a formal rent valuation.
- You must disclose your rental income on an annual self-assessment form, and a formal contract must be established to cover the rental agreement.
- You must either dedicate a room of your house solely for business so that you do not breach the terms of your home insurance policy and claim expenses by justifying it as commercial. Or, if you are using a separate building on your residential premises, you can claim back all the expenses for maintaining that building, or charge a proportion of it only if the building has shared residential use. And if the business owns the separate building, then more complex tax rules apply, as it will become a business asset rather than a personal one.
- If you co-own your home, then while filing a tax return, the rent must be split according to the proportion of your home each person owns.
- Before signing off the rental agreement, discuss the licensing option with your accountant first and make sure the deal is reasonable, and well-drafted as certain tax traps can bog you down to a point where it becomes challenging to come out later.
Read more in brief about : Business Expenses Differences Between Sole Trader Vs Limited Company
Bottom line
Each of us is always looking for ways to save on tax, and keeping a business tax efficient is not as easy as it sounds. A sole trader or a limited company, whatever you may be, working out your allowable expenses and keeping in check with HMRC to know what can and can’t be claimed can turn out better if handed over to professionals like DNS Accountants. Get in touch now before you end up paying more than required.
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