Self-employed and working from home? Save tax. Claim working from home expenses.

Good news! If you’re one of the UK’s many self-employed workers who work from home, you can claim some of the cost of running your home as a business expense, which will save you tax!

Here’s how to work out how much you can claim……….

What do I actually do from home?

First things first. Don’t forget, working from home includes not only the ‘core’ of your job, i.e. production of goods or carrying out the service you provide. It also includes the many hours spent networking online, advertising, researching, updating websites etc. It’s important to remember all of this extra time. You’ll see why below!

Simplified or detailed?

If you work more than 25 hours per month from home and you’re a sole trader, or in a partnership with other individuals, then you’re eligible to use the simplified accounting method. As the name suggests, this is the simplest way of calculating how much you can claim by using a flat rate calculation.

Simplified flat rate method

The flat rate method simply asks you to look at how many hours per month you spend running your business from home (remember all those extra hours mentioned above!) and then include a fixed amount in your accounts for business use of home.

The monthly rates are as follows:

• 25-50 hours - £10 per month

• 51-100 hours - £18 per month

• 101 hours or more - £26 per month

If you normally work around 75 hours per month, then you would include in your accounts an allowance of:

£18 per month x 12 months = £216

If the number of hours you work from home varies significantly month to month, then just select the most appropriate rate for each month and then total them up at the end of the year, for example:

Three months x £10 per month = £30

Four months x £26 per month = £104

Five months x £18 per month = £90

Total to include in your accounts - £224

The simplified flat rate method is certainly much quicker than working out actual costs, but the figure may not be as high. Despite this, the flat rate method is still a great way to save tax with a simple calculation. You also don’t need to keep receipts if using this method. Don’t forget that you can still claim telephone and broadband costs on top of the flat rate work from home cost.

Detailed Method

If your business isn’t eligible to use the simplified flat rate method above, or you’d like to calculate your work from home expenses in more detail (and potentially save more tax), this is the method for you.

Fair & reasonable

HMRC state that any claims using this method have to be ‘fair and reasonable’ in splitting your business element from the private element of your home running costs. So, if you’re a virtual PA, you’ll spend most of your day working from home. However, if you’re a painter and decorator, you might spend one or two hours per night doing admin and ordering materials. The rest of your time would be out at your customer’s premises.

So how do you split the costs to keep the tax man happy?

1 – Total up costs

The first step is to calculate the total running costs of your home for the year. You should include the following costs in this calculation:

· Mortgage interest (only interest, not the capital part)

· Rent paid to a landlord/council

· Electric & Gas

2 - Calculate business usage

One recognised method is to work out how many rooms you have in your home and identify how many of those rooms you use for business.

Then calculate how much time you use each of these rooms for business.

3 – Final Calculation

Say there are ten rooms in your home. You only use one room for business. 80% of the time that room is used is for business. Your total home running costs are £6,500 per year. Your calculation would be as follows:

Cost per room - £6,500 / 10 ten rooms = £650 per room.

Business time for that room - £650 x 0.8 = £520

The total to include in your accounts is, therefore, £520.

Don’t forget you can still claim for Telephone and Broadband costs

To avoid capital tax complications, it's best to keep all rooms in your home mixed purpose. So if you have an office, make sure the kids use it for homework, or your partner works from home in there.

As always, please consult your accountant to ensure the above information is applicable to you.

Zest Accountants provide personalised accounting services to small business owners. Find out how they could help you and your small business here.