Have you been working from home long before the world had heard of COVID? Where the word ‘pandemic’ was something out of a film? And nobody knew what the hell ‘furlough’ meant? Or are you new to the art of working and living in the same space?
According to the Office for National Statistics (ONS) in April 2020, 46.6% of employed people did some work at home, with 86% of those doing so because of COVID-19.
If you’re a self-employed sole-trader, you need to know what expenses you can claim for when it comes to working from home tax relief.
So let’s get started.
The Two Ways To Claim Working From Home Tax Relief
Similar to claiming for your car, HMRC offers you two ways to claim working from home tax relief: simplified expenses (the easy way) and the other way (the hard way).
Let’s start with the latter.
The Hard Way
If you’ve read our article about self-employed car allowance tax, you’ll know one way to claim for business expenses is to add up the individual costs associated with your car, then work out the business % use of the total, thereby giving you your overall taxable allowance.
But instead of MOTs, services, and insurance, when looking at working from home tax relief you need to factor in the following costs:
- Council tax
- And mortgage interest or rent
Once you’ve added up these individual costs, the next thing to do is to work out the business % of these costs by factoring in the area of the house you use for business.
Remember, keeping the taxman happy is important, and the way he likes this done is to divide your costs by the number of rooms you use for business.
Your house has four rooms:
- A living room
- Master bedroom
- Spare bedroom
Let’s say your heating bill is £600 a year. You can claim a quarter of this amount since one out of the four rooms is used for business. That would mean you could claim £150.
Now, if you only work from home one day a week, you need to split this figure by 7 again.
That would leave you with £14.28. You’d then apply this same method of working out to the other business expenses listed above.
If you use the room for business and personal, you need to work out the number of hours a year you use the room and the number of those which are for business.
If that sounds too much of a faff (and for most people, it is) your best bet is to go down the simplified expenses route.
The Easy Way
Yes, there is an easy way.
Super-easy, in fact.
And, in truth, the simplified method is what most self-employed sole traders choose when claiming for working from home tax relief.
To use this method, you must work more than 25 hours a month from home. Assuming you do, you can work out how much you can claim using this table from HMRC:
If you’re working full-time from home, that’s £26 per month you can claim for working from home costs.
That equates to £312 a year. Nice.
There are some allowable expenses associated with working from home that aren’t covered in the simplified expenses method, so be sure to add these on.
Working From Home Tax Relief Add-Ons
Again, you need to work out the business use % and then apply this to the overall cost. Work from home seven hours a day and stream Netflix for three hours a night? You can claim 70% of the total cost of WIFI.
Things like your desk, chair, bookcases, filing cabinets. Anything you need for your office. Some of these may be considered start-up costs and so you spread the cost of them via their depreciation.
Pens, paper, printer, printing, and pretty much everything you see on your desk.
Which method of working from home tax relief should you choose?
There’s no blanket best option for anyone or any business.
Knowing which option is the most tax-efficient for you is something you’ll have to do the maths for yourself, or better yet, with the help of a professional.
Accountants can be expensive. That’s why we’ve set up dedicated bookkeeping and Self-Assessment Tax Return packages for sole-traders which start from as little as £25+VAT per hour.
For more info on that, have a read here.
Test your knowledge of the self-employed allowable expenses list with our short tax quiz!
You may find you’ve been overpaying hundreds, if not thousands of pounds in tax every year. And if you get all the questions right, at least you know you’re clued up.