Tax relief – the best method if you are self-employed and work from home

Tax relief and working from home Did you know if you are self-employed and work from home there are two options for working out your tax relief? We explain both, so you can choose the best one for you.

The good news is you are able to claim tax relief for business use of your home, the only question is whether to use (here come the technical terms) HMRC’s fixed rate or apportionment. Don’t worry: we’ll guide you through.

HMRC flat rate

First let’s look at the fixed rate, since this is the simplest place to start and you’ll want to compare both to work out which is best for you anyway. You simply work out how many hours a month you spend running your business from home and look at the table below. Apply it to your calculations and deduct from your tax bill. Easy.

Hours worked per monthTax relief per month
25 to 50£10
51 to 100£18

*Figures correct 01 Dec 2017. Please note the fixed rate method covers heat, light and power costs. A separate calculation will still be needed for other costs like telephone and broadband (see below).

There is a price to pay for ease though, because it is likely you could save more using the apportionment method.

Apportioning home working expenses

For this second method you will need to work out the actual running costs of your home and then apportion these for business use. It is more time consuming, but could save you money.

The key thing you need to figure out is what proportion of the rooms or floorspace (whichever is more reasonable) you typically use for your business and how much time you spend working in that area.

Here is an example:

Paul runs his self-employed consultancy business from home in the year ended 30th June 2017. His household costs were as follows for the year:

Council tax £1800
Contents and buildings insurance £400
Electricity and gas £1500
Mortgage interest £2000
Maintenance contract for heating system £400

The business does not use a significant amount of water and so (in accordance with HMRC guidance) he isn’t including the water charges in his calculations.

Paul uses one of the bedrooms in his house (which has 2 reception rooms and 3 bedrooms in total) as his office, for around 6 hours a days 5 days a week (on average).

The total household costs are £6,100 and Paul uses his one room for 30 hours per week on average. In total there are 5 rooms that are used for 168 hours (24×7) in a week. Bathrooms, toilets and hallways aren’t included, as per HMRC guidance.

So Paul can claim £1,089 (£6,100 x 30/168) of the household costs as a deduction from his taxable business profits. This compares to £120 if he had used the fixed rate method.

During the year Paul has also incurred broadband and telephone costs that he estimates are used 55% for business purposes, which total £400. Paul can claim a deduction for £220 (£400 x 55%).

An important note

It is worth mentioning that you should try not to use one room at home for solely business purposes all the time because if you sell your home HMRC may argue that capital gains tax may be due. You should therefore consider creating a room that has a dual purpose i.e. office/music room.

All these calculations should be viewed as guides – you should always only claim what you believe is a reasonable amount. There are more examples of calculations on the HMRC website, should you need them.

Would you like someone else to take care of all this? Contact us for a free chat and quote to show how we can help save you money and leave you to concentrate on what you do best: running your business.

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