How to tax-deduct working from home
Whether you’re a teacher, writer or a field worker – many professions require at least some work to be done from the employee’s home, while certain occupational groups now work entirely remotely. To create the perfect atmosphere for focused working, it’s worth setting up a dedicated room as an office at home. In some cases, it’s even possible to claim expenses for working from home, furniture, and office equipment as a tax-deductible home office expense. We’ll show you what to look out for when considering tax relief when working from your office at home.
- Who’s allowed to tax-deduct a room as a home office?
- Free whitepaper
- When is working from home considered tax-deductible?
- Working from home: What am I allowed to write off?
- How to deduct expenses when working from home?
- Coronavirus: Tax relief for working from home
Who’s allowed to tax-deduct a room as a home office?
Not every professional will be able to claim relief for a dedicated office at home or work equipment to lower their taxes. Whether you can deduct a home office depends, in the first instance, on whether you’re employed or self-employed. The UK regulations that govern who and what can and can’t be tax-deducted are stipulated by the HMRC, and generally differ for sole traders and limited companies. Generally, only the self-employed or limited companies can write off their home offices. However, where an employment contract specifically requires an employee to work from home (i.e.., this not being optional), employed people may claim back expenses for working from home at the end of the year.
You’ll qualify as self-employed when you’re working for yourself or have set-up a small business. This may include working freelance, providing services as an independent contractor, being a partner in a business or working for yourself part-time or on the side.
Working from home during the coronavirus shutdown: How to handle working remotely
When is working from home considered tax-deductible?
To claim expenses on a work room in your home, some requirements need to be met. Not every space that comes equipped with a desk automatically qualifies for tax relief. There are some requirements that have to be met:
- You must be using your office at home regularly and exclusively for business purposes. That means if you’re using the family dining table to conduct your work in the mornings or evenings, you cannot claim a tax deduction. The desk area would have to be used solely for business to qualify. If, for example, you regularly meet and greet clients in a separate room, this would be suitable as a write-off.
- Storage, day care facilities, and separate structures all typically qualify for tax relief if they are used solely for business purposes.
- The home office must be your principal place of business. That means, if you tend to work away from your office at home and only rarely use it to fill in some paperwork, you may not be able to claim expenses on the room.
If you’re renting an office room or a co-working space outside of your home, you can fully tax-deduct the costs for the space as a business expense. However, your office at home would not qualify for an additional or separate allowable relief.
Limited companies can also set up rental agreements between themselves (acting as the homeowner) and their limited company. In this way, they have a formal written agreement over the amount they can tax-deduct. However, this amount needs to be reasonable and equate to the space you actually use for business purpose.
Working from home: What am I allowed to write off?
To write off the costs of working from home, you should know which types of expenses you can deduct. Among the costs you can tax-deduct are:
- Utility bills (gas, electric, water)
- Home contents and buildings insurance
- Telephone, internet, and mobile phone bills
- Part of your rent or mortgage
- Security costs
- Repair costs
- Office equipment
- Office furniture
- Travel costs
- Staff costs
- Advertising/marketing and training fees
Expenses paid to set-up an office at home can be deducted retrospectively.
How to write off your rent or mortgage?
Whilst expenses for furniture or office equipment such as a computer can be fully tax-deducted, rent and mortgages can only be partially written off. There are generally two options used to calculate how much taxpayers can deduct.
Example 1: simplified expenses
One of the easiest options is to use the HMRC’s flat rates that are based on the hours worked from home. These should only be used if you spend more than 25 hours per month working from home.
|Hours home office is used for per month
|Flat rate per month
The HMRC website also provides flat rates for vehicle use per month and for business owners living at their premises (for example, hotel owners).
Example 2: calculating actual expenses
The second option includes calculating your expenses based on the actual space you use and all other expenses such as repair costs and utility bills. The way you want to calculate this is up to you. For example, if there are four rooms in your house and you use one of them as your office at a rent of £1,000 per month, you would divide the rent by the number of rooms to obtain the expenses estimate:
£1,000 / 4 = £250
You’ll be able to claim £250 per month for your office. Alternatively, you could measure the actual square metres of your office at home. Let’s assume the total space of your home is 1,000 square metres and you use 100 square metres (10%) of it as your home office. You would be able to write off 10% of all expenses as follows:
|% of home office
|Allowable deductible expense
According to the calculation above, you would be able to write off £150 in total per month for your home office set-up. Generally, you cannot deduct more than your gross income was. So, if your yearly expenses were £1,500, but you only earned £1,000, you cannot claim the full expense amount.
A well-equipped office at home should include the Microsoft Office Suite. IONOS provides Microsoft 365 Business including Office, OneDrive and Microsoft Teams – the optimal solution for businesses and sole traders. The tools allow you to collaborate with others via the cloud. Costs for Microsoft 365 can be deducted as a business expense.
How to deduct expenses when working from home?
You can claim tax relief on your office at home using the self-assessment tax return forms. If you’re self-employed, you can enter the deduction for your home office expenses in the appropriate section in the self-assessment form online or on paper. You can either provide the total expenses or list a detailed break-down of expenses. Limited companies generally fill out a company tax return.
It’s a good idea to keep a record of any expenses you want to write off when working from home until the end of the year and file them safely in case of future external audits by the HMRC.
Where two or more people share an office at home, they cannot each claim the full amount for the space, but must divide the allowable expenses for working from home between them. However, they may be able to claim higher relief for utilities and bills, depending on usage.
Coronavirus: Tax relief for working from home
From April 6th, 2020, employers have been able to pay their employees up to £6 a week tax-free to cover additional costs if they have been made to work from home to prevent the virus from spreading. Those that haven’t received this extra payment from their employers can apply to receive the tax relief from HMRC. This online portal was launched on October 1st, 2020 and in the first ten days, saw almost 55,000 claims submitted. The portal provides a hassle-free way to claim the relief without needing to provide receipts or to make complicated calculations.
Once the application has been approved, the online portal will adjust the employee’s tax code for the 2020 to 2021 tax year. The employee will receive the tax relief for working from home directly through their salary and will continue to do so until March 2021.
Not everyone receives the full £6 per week though – it depends on how much tax the employee usually pays. For example, if an employee pays the basic 20% tax rate and claims tax relief on £6 a week, they will receive £1.20 a week in tax relief (20% of £6 a week). Those on a higher tax rate such as 40% would therefore receive double the amount i.e., £2.40.