Guide to tax savings when working from home
Introduction
As the way we work continues to evolve, the number of people working from home continues to grow. This could be on a full time basis or as part of flexible working arrangements. However many people don't realise what they can claim in tax.
The tax treatment differs depending on whether you're in empoyment, self employed (running a business as a sole trader or partnership) or using your home to manage rental of a buy-to-let property.
Employees who work from home
Employees who work from home on a part-time or full-time basis can claim certain business expenses. The tax treatment depends on whether you have to work from home or are doing so by choice.
Tax allowances for employees who have to work from home
If your employment requires you to work from home you are entitled to claim certain business expenses against your employment income - reducing your tax bill. This includes any business phone calls and the extra cost of heating and lighting your work area at home.
- If you haven't kept detailed records of these expenses, you can still claim up to £4 per week.
- If you're entitled to claim more than this you willl need to proof that you incurred the cost.
The costs have to be necessary business expenses and they have to be additional to costs you'd have otherwised incurred by living at your home. For example you can't claim part of your mortgage interest, rent, council tax, phone line rental, or your broadband costs if you'd have incurred them anyway. You can only claim the additional costs such as phone calls charged on top of your line rental.
Tax allowances for employees who choose to work from home
Many people who don't have to work from home choose to do so anyway, for example negotiating flexible working arrangements with their employer. Since these arrangements are a matter of choice, you can't claim business expenses against your taxable income. Even if it's written into your contract that your place of work is at home, HMRC could deem that the contract was reflecting your personal choice.
What you can do is request your employer to reimburse you for your home expenses (e.g. business calls). Where they agree to do so you won't pay any Income Tax or National Insurace Contributions. As for employees who have to work from home:
- If you haven't kept detailed records of these expenses, you can still claim up to £4 per week.
- If you're entitled to claim more than this you willl need to proof that you incurred the cost.
Self-employed workers working from home
If you're self-employed the rules are far more generous around the expenses you can claim. You can get tax relief on a proportion of most of your household cost, including:
- Mortgage interest, Council Tax and home insurance
- Water rates, heating and electricity
- Phone line rental and broadband costs
- General repairs and maintenance
- Cleaning
It's necessary to apportion these costs between personal use by you and your family and business use. For most costs this is done by calculating which rooms you use in your business, for what fraction of time and what the respective proportion of the home the room represents. This last fraction could be calculated based on floor space or the number of rooms, whichever is more reasonable.
You can still claim 100% of expenses that are directly attributable to your business and can apportion related fixed costs based on the proportion of business and personal use.
Example
For example you may have a dedicated study that makes up 15% of your home, which you use 4 days per week. Other family members also use the room one day per week. Let's assume you also use your kitchen to work in half a day per week and that this makes up 20% of your home. This would allow you to apportion 13% of your "variable" household costs to your business (such as water, heating, electricity) and around 3% of your fixed costs (such as mortgage interest and council tax).
Let's also assume you make business calls that make up 75% of your total phone bill. You can claim 100% of your business calls and can claim 75% of your line rental costs.
Capital Gains Tax
Any gain you make on selling your main home is normally excempt from Capital Gains Tax. However, if you use room exclusively for running your business you will be liable for Capital Gains Tax on the related percentage of the gain when you sell your home. In the above example, if the study had been used exclusively for running your business then 15% of the gain on selling your home would be subject to Capital Gains Tax (although this is further apportioned based on the time you operated your business relative to the total time you owned the property).
Rooms that are only used partially for your business (even if the percentage of other use is very small) do not attract this Capital Gains Tax charge.
General Business expense
For more details on what type of business expenses you can claim if you are self employed, see our free guide to business expenses.