Tax Deductions for Working from Home

It is very common for self employed individuals to claim part of their household costs as business expenses when they work from home. This blog post looks at how much can be claimed, and looks at the differing treatment for sole traders and limited companies - the rules are very different.

Sole Traders

Sole traders have two choices:

  1. Claim simplified flat rate expenses, or

  2. Work out actual costs of working from home.

Simplified Flat Rate Expenses

Under the simplified flat-rate expenses method, individuals can claim a flat rate based on the number of hours they work from home each month and will need to work a minimum of 25 hours a month from home to qualify. The monthly flat rate expenses that can be deducted from profits are as follows:

  • £10 - 25 to 50 hours working from home per month

  • £18 - 51 to 100 hours per month

  • £26 - 101 or more hours per month

The flat rate covers all household goods and services, food and drink and utility bills, but not mortgage interest, rent, council tax or rates. Individuals who use simplified expenses can also claim the business proportion of their telephone or internet expenses as these are not included in the flat rate allowance.

Actual costs of working from home

Costs of working from home might include part of (i.e. a reasonable business proportion of) the bills for heating, light, water, and rent or mortgage interest. What is ‘reasonable’ is influenced by:

  • The size of the ‘office’ in relation to the whole property

  • The length of time individuals spend working from home

  • Whether a room is occupied exclusively for business or use a room for business and domestic purposes

  • The number of other people living in the property might affect the proportion of private use

Limited Companies

It is a common misconception that directors of limited companies (even if they are the sole director) are treated the same way as sole traders (who can reclaim the costs of rent, etc.) - they can’t.

This is because the company and the director are legally separate from each other.

Like sole traders, there are 2 ways of working out home office expenses. The 2 methods are:

  1. Flat rate expenses (these are different for limited companies compared to sole traders)

  2. Rental agreement between the director and the company

Flat Rate Expenses for Companies

The easiest way to calculate home office expenses is to use HMRC’s flat rate allowance for the additional costs of running a business from home. Receipts are not needed to prove the expense and the company can claim £4 per week, equating to £208 for a full year.

Rental Agreement

The only way that a claim for more than the £208-a-year flat rate can be made is if the director charges the company rent in respect of the proportion of the rent or mortgage interest paid by the household.

The rental income would need to be disclosed on the director’s self-assessment tax return and a formal rental contract would need to be drawn up to cover the rental agreement. Not having the formal agreement in places the director at risk of HMRC classifying the rent received from your limited company as additional salary.

Capital Gains Tax Considerations

Where individuals use a room in a home they own ‘exclusively’ for work purposes, this could reduce the Capital Gains Tax (CGT) Principal Private Residence (PPR) exemption when the property is sold. This is because any part of the property exclusively used for business will not qualify for PPR relief. This problem may be avoided by ensuring there is some domestic use of the study.

For more information on CGT when properties are sold and information on PPR, see our blog post.

Contact Us

Please contact us to find out how the above applies in your circumstances, how you can reduce your tax liabilities and maximise your tax efficiency.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.