These notes are designed to go with the JF Financial working from home calculator.

If you work from home as a self employed sole trader or if you work through your own limited company there are two different ways to claim working from home expenses:

  1. Use the HMRC fixed rate – these are outlined below, see option 1
  2. Charge a proportion of your home running costs, these are covered in option 2

If you do quite a lot of work from home, option 2 is usually better and you can use our calculator for this, however if you prefer to use the fixed rate this is how it works:

Option 1 – HMRC fixed rates (2017-18 and 2018-19):

For limited companies the HMRC fixed rate is currently £4 per week.

For self employed sole traders the fixed rate depends on how much work from home you do per month, per the table below:

 

However, as you have downloaded the JF Financial working from home calculator we will assume you don’t want to use the fixed rates above and instead want to claim for a proportion of your home running costs which is covered in the section below:

 

Option 2 – Proportion of your home running costs (using the JF Financial calculator)

 

For this option you can use the JF Financial working from calculator but we will explain the rationale behind how it works.

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, so if you have a capital repayment mortgage you will have to split out your payments between the interest and capital elements.

NOTE – new mortgage interest relief restrictions have come into effect from 17/18, we cover this at the end of this section – these changes affect higher and upper rate tax payers.

If you rent then it is simply the rental charge that you include in the calculations. 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 can include are 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 contracting / freelancing work.

Let’s then assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens. If the total running costs of your house per year are £15,000 it would therefore be justifiable to charge £1,500 per year (50% x 1/5 x £15,000) to your business as rent.

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.

In order for the cost to be allowable for tax the cost must not be above what might be considered to be a fair market rent. You should therefore get a few local prices of comparable office spaces and save them as back up to your calculation.

If you are a limited company you also need to document something official between you personally and your company to confirm that you will be charging your company rent. The most common way of doing this is by drawing up a simple license agreement, we have a simple template at the bottom of this page that you may want to use – however we are not solicitors so it is to be used at your own risk.

From a personal perspective you are actually generating rental income from your business, however because we have allocated only a fair proportion of your running costs, your rental costs will be the same as your rental income, so there is £nil rental profit.

Also 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.

 

UPDATE for 17/18 – mortgage interest relief restrictions

From April 2017 new rules came in which restrict the tax relief available to individual landlords with regards to the finance costs (e.g. mortgage interest) that they can offset against their property income.

The new rules are somewhat complicated and the changes are phased over a few tax years.

The old rules (before 17/18) said that if you have property income, you can offset the loan (mortgage) interest for that property against the rental profits.

So if you had £5,000 of rental income and £2,000 of allowable interest, that would be £3,000 of taxable rental profit (ignoring any other relevant costs for simplicity).

The new rules say that you can no longer treat the loan interest as an allowable expense, instead you get a basic rate (20%) tax deduction for the loan interest, which is applied for separately on the tax return.

So if you are a higher rate tax payer you now only get 20% tax relief instead of the higher rate of relief that you would have received before.

However these changes are being phased in over the four tax years 2017/18 to 2020/21

For the 2017/18 tax year, you will still be able to claim 75% of your property loan interest using the old method of it being an allowable expense thus reducing your taxable profit, with the other 25% accounted for as a basic rate tax deduction of 20%.

For the 2018/19 tax year, you will still be able to claim 50% of your property loan interest using the old method of it being an allowable expense thus reducing your taxable profit, with the other 50% accounted for as a basic rate tax deduction of 20%.

Our working from home calculator works this all out for you so don’t worry.

You should now be able to plug the relevant figures into our home office calculator to work out your claim.

 

Sample license agreement for limited company

Below is a simple license agreement you may want to use between your limited company and you personally – however please bear in mind that we are not solicitors so you may want to ask a solicitor to draft one for you.

 

Licence agreement between <Limited Company> and the Director(s)

 

Date:

The Director(s) have agreed that in consideration for <Limited Company>’s use of the Director(s) Home Office, <Limited Company> shall reimburse to the Director(s) such proportion of any expenses they incur in providing it as is fairly attributable to the use of the Home Office by <Limited Company> including where relevant (but without limitation) provision of broadband facilities, telephone costs, a proportion of mortgage interest or rent, insurance, heating and lighting costs, maintenance and repair.

The proportion is to be agreed between the parties from time to time having regard to the actual use made by <Limited Company> of the Home Office.

Signed on behalf of <<Limited Company> and the Director(s)

 

 

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