Limited company directors and working from home

If you are running a limited company from a commercial office space, any costs you incur such as rent, business rates, utilities, insurances and service charges will usually be allowable costs for your company which reduce the business profit and therefore reduce the corporation tax.

However, what about if you are running your company from home?

As a director working from your home you are allowed to claim certain costs back from your company for the provision of the home office space.

If you want to keep things simple you can choose to claim the HMRC fixed home working allowance which is £4 per week and rises to £6 per week from the 2020/21 tax year. Over a full year at £6 per week this would be worth £312 in total.

For many directors the actual cost of providing their home office space to their company works out to cost a fair bit more than £6 per week, in which case they may prefer to claim a fair proportion of their home running costs – this is where things get a bit more complicated.

First, there needs to be a license agreement in place between the director and their limited company. This will formally outline that the limited company is allowed to use a certain room or space of the home and in exchange a rent will be paid by the limited company to the director.

Then, you need to work out how much can be charged to the company for the office space being provided.

Before doing this lets take a step back and look at an example of a director charging £200 per month to their company for the home office.

For the director this is £200 per month of rental income that would potentially need to be disclosed on the personal tax return. However, the director will also have costs of providing this office space to the limited company – these costs will reduce the rental profit.

The typical tax planning strategy is to only charge a fair proportion of the running costs of the property to ensure that no rental profit is being generated on the director.

Going back to our example, if a fair business proportion of the allowable property costs were £150 per month, then it would make sense for this to be how much is charged to the business rather than £200 per month, as this will result in no rental profit on the director, which means no personal tax impact.

 

use of home for directors

 

What costs can be included in the working from home calculation

Now we’ll look at what costs are allowed to be considered when working out a fair proportion of the home running costs.

The typical costs that can be considered are:

  • Rent
  • Council tax
  • Service charges
  • Electricity & gas
  • Contents insurance
  • Cleaning

You may have noticed that we have included rent in the list above but we have not included mortgage payments.

Mortgage capital repayments have never been allowed to be offset against property income, however in the past mortgage interest payments would have been allowed to be included in the calculation, but this is no longer permitted.

This is due to the relatively new restriction of finance costs relief for individual landlords which is now fully in place for the 2020-21 tax year onwards, so from 2020-21 no mortgage costs can be included in working from home claims. For the 3 previous tax years before 2020-21 there was a phased introduction of the new restrictions.

[Technically, although you cannot claim a proportion of your mortgage interest you are entitled to a basic rate (20%) tax deduction for the mortgage interest, which is applied for separately on the personal tax return. However if you are extracting money from your company via low salary and dividends and you don’t have any other income then this 20% tax deduction cannot get applied anywhere as you aren’t paying 20% tax on any of your income, so it means effectively you don’t get any tax deduction for your interest.]

These new restrictions on mortgage interest mean that working from home claims are likely to be higher for someone who is paying rent compared to someone with a mortgage.

 

How to calculate a fair proportion of the home running costs

Now we know what categories of costs can be included in the working from home claim, we need to work out what proportion can be charged to the business.

The simplest way of doing this is to look at how many rooms you have in your property excluding bathrooms, kitchens and hallways, then work out what % of the time you use one (or more) of the rooms for business use.

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.

As an example, if we assume that you use one of your rooms as an office for your company and 80% of the time that it’s in use is for your business, and we also assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens.

If the total allowable running costs of your home per year are £10,000 it would therefore be fair to claim £10,000 / 5 rooms x 80% business use = £1,600.

This would mean you are charging £1,600 per year to your company for rent but you personally aren’t generating a rental profit because the £1,600 of property income is offset by £1,600 of allowable property costs.

 

Tax efficiency of claiming home office expenses

In the example above where the home office claim totaled £1,600, lets compare paying yourself this £1,600 as a home office claim, compared to £1,600 of dividends.

Assuming you’re in the basic tax band and have used up your personal allowance and dividend allowance, £1,600 of dividends would be taxed at 7.5% which is £120 of personal tax. If you’re in the higher tax band then the dividend tax rate would be 32.5% which would mean £520 of personal tax.

However, £1,600 of rental income would not result in any personal tax (because you have not generated a rental profit due to only claiming a fair proportion of the allowable property costs) and your company would also save corporation tax on the expense – at the current corporation tax rate of 19% this  would be £304 of corporation tax savings.

 

Additional points

A few final points to bear in mind:

  • In order for the cost to be allowable as a deduction for corporation tax in your company accounts, the rental charge must not be above what might be considered to be a fair market rent. You should therefore get a few local comparative prices for similar office spaces and save them as back up to your calculation.
  • 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 in the future.
  • Check your home insurance policy to make sure running a business from home doesn’t cause any issues.
  • If you are renting a property you should check your rental agreement to make sure you’re allowed to run a business from your home.