Tax relief for homeworkers in the UK - 2021
A topic that crops up a lot is the mechanism for homeworkers to obtain tax relief for costs incurred working from home. In general, we come across three main types of homeworkers as far as tax is concerned:
Employees
Self Employed individuals
One man/woman Ltd companies
We look at the main tax reliefs commonly available in relation to household costs.
Employees
Employees tend to be able to claim the least against tax due to the strict rules for allowable employment expenses. What follows assumes you are required to work from home.
The simplest claim to make is for the £6 a week flat rate allowance from 6 April 2020 (for previous tax years the rate is £4 a week) - you will not need to keep evidence of your extra costs.
You make the claim online or in your self-assessment tax return if you have one. For a higher rate taxpayer, the claim is worth £6 x 52 x 40% = £124.80 per year. The claim is simple, so go direct to the HMRC website - I would not suggest paying anyone to make such claims for you.
If you can calculate the exact amount of extra costs you have incurred for heat, light etc., and if these costs exceed the £6 per week and want to claim those expenses, you’ll need evidence such as receipts, bills or contracts and calculations of how you arrived at the higher figure.
Items you specifically cannot include are items you would have paid anyway regardless of working from home such as rent, council tax, mortgage interest.
Self employed
The deductions available to self-employed individuals are broader. You may be able to claim a proportion of your costs for things like:
· heating
· electricity
· council tax
· mortgage interest or rent
· internet and telephone use
You will need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business and the amount of time you spend working from home in those rooms.
Again, HMRC have a simplified (but not very generous) flat rate scheme based on the number of hours you work at home, see the table below.
Hours of business use per month
Flat rate per month
You may spot that the £26 pcm is the same as the £6 per week for employees. But in this case, you can also claim for a portion of telephone/internet costs.
Additionally, self-employed individuals can claim capital allowances for equipment at home such as computers, desks, lamps etc that are for business use.
One claim that small scale self-employed homeworkers can use is the flat £1,000 trading allowance. This is not usually the best claim, but it is simple, requires no record keeping at all and can suit those who genuinely do not incur many costs. If you use this allowance, you cannot make other claims for any expenses or allowances.
Whichever claims you choose, the claims are made on your self-assessment tax return.
Trading as an Ltd
The two main options in this situation are to make a claim as an employee as above, or to enter into a home office licence agreement with the company.
The home office licence gives the company nonexclusive use of part of your home, utilities etc. for business use, for which the company pays you a monthly amount.
This amount (if it is realistic) is tax deductible in the company, and becomes rental income for you as an individual. You disclose this rental income on your personal tax return less the deduction for a portion of the home running cost, as with the self-employed situation above.
Ideally the rent charged is pitched at a level that is very close to costs so that you do not have additional personal tax to pay.
In the Ltd situation ideally the company should buy all equipment and claim capital allowances (and possibly VAT) itself.
Alec is a chartered certified accountant with DSA Prospect. He and his team are very experienced with the requirements of homeworkers, and they can be found at www.dsaprospect.co.uk