What can I claim for working from home?

I am an interior stylist trading as a self employed sole trader and a lot of my admin and planning is done from home – am I able to claim some costs for working from home when I do my annual tax return?

 

 

Answer, Nov 2017

The good news is that you will be able to claim some costs for working from home when you are self employed.

Option 1 – simplified method

If you want to keep things simple, you can just total up the number or hours you spend working from home each month and use HMRC’s “simplified expenses” rates for sole traders.

Referring to the table below, add up the appropriate Flat Rate for each of the twelve months and put this down as your working from home expense.

 

 

Remember that the above hours are per month. Most of us find it easier to work out how we spend our time on a weekly basis, so let’s do an example starting from there.

Let’s assume that on average you spend an hour each day Monday to Friday on routine emails, other paperwork and a few phone calls and then you fit in 4 hours over the weekend planning. That adds up to 9 hours per week, and equates to approx 40 hours per month, justifying a monthly Flat Rate allowance of £10 for the month.

In reality, you’re probably spending far more hours than this working from home. So, keep a note of the hours you’re using your home for business, either regularly, or when working on a project and note down the Flat Rate to use for each month.

Even if you work from home for over 100 hours every month, the most you can claim under the “simplified method” is £312 per year.

 

Option 2 – proportion of costs method

As an alternative to using simplified expenses, HMRC allows you to claim the proportion of your costs that relate to your business.

Firstly work out what your actual running costs of your home are. If you own a property this can include mortgage interest but not capital repayments. If you rent then it is simply the rental charge.

If you pay costs jointly that’s fine but you can’t include costs that are being paid entirely by someone else.

Other costs which you need to capture include gas, electricity, insurance, service charges, cleaning and council tax.

You then need to work out what proportion of these costs would be fair to allocate to your business.

The simple way of doing this is to firstly work out how many rooms you have in your house excluding bathrooms, kitchens and hallways. You then need to work out what % of the time you use one of the rooms for business use.

Let’s assume you use one of your rooms as an office and 50% of the time that it is in use it is used for your self employed business. Let’s then assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens.

If your total running costs of your house per year are £15,000 it would therefore be justifiable to claim £1,500 per year  – this is worked out by taking the total costs of £15,000, dividing this between the 5 rooms to give £3,000 and then only claiming 50% of this as that is the proportion of time that room is used for business.

If you are renting only part of a property (e.g. a house share) then you should only include the rooms that you have access to in the calculation.

Another tip is that you shouldn’t use your office room entirely for business use – keep at least a small element of the room for personal use as this protects you from any potential capital gains tax issues.

 

Comparison

So, what difference does all the above make to your annual tax return and, most importantly, your tax bill?

Let’s assume you have sales for the year of £40,000 and you’ve paid out £10,000 in expenses.

Comparing the middle simplified expenses rate of £18 per month (£216 per year), and the above cost apportionment example of £1,500, the calculations and tax saving would be as detailed below, using 2017/18 tax rates.

This example assumes no other taxable income other than self employment.

 

You can see putting through a home office claim using the proportion of costs method would save £435 of tax and national insurance compared to just £62 by using the simplified method.

Please bear in mind that the advice in this article is only relevant to the self employed – things are a little more complicated for limited companies and we discuss this in another article here.

Also new rules around property interest relief for higher tax earners came in from April 2017 so if your earnings are above the basic tax band you will have to adjust your mortgage interest in your ‘use of home as office’ calculation accordingly. More info can be found on these changes here.