The HMRC Home Office Tax Deduction Rules
One of the benefits of being self-employed is working from home. Make sure you understand the HRMC use of home as office tax deduction rules, though.
How do I calculate the use of home as an office tax deduction?
You can go about this in one of two ways.
The first way is to use simplified business expenses. This involves looking at how many hours you spend working from home each week and deducting a flat rate from your taxes.
Using simplified business expenses is easy and straightforward. However, the tax deduction itself is usually quite small. In addition, the flat rate doesn’t include telephone and internet costs. You’ll need to calculate these expenses separately.
The second method is called the actual costs method. As the name suggests, this involves calculating your home’s running costs, such as rent and utilities. Then, you’ll need to deduct the business proportion of those costs.
The actual costs method requires more effort. That said, depending on your circumstances, it could mean a larger use of home as office tax deduction.
HMRC’s simplified expenses checker can help you decide which method would work best for you.
Who can use simplified business expenses?
You can use simplified business expenses if:
- You’re a sole trader
- You’re in a partnership and all the other partners are individuals
- You work from home more than 25 hours a month
- You’re not VAT registered
You have to register for VAT if your turnover is more than £85,000 per year.
How do I calculate simplified business expenses?
- Step 1: Calculate how many hours you work each month
- Step 2: Use HMRC’s simplified expenses table (which we’ve reproduced in the example below) to find out your monthly flat rate.
- Step 3: Multiply the flat rate by the number of months worked
- Step 4: Calculate the business proportion of your telephone and internet costs by dividing your bill by the number of hours worked
What are the HMRC rates for a home office?
Calculating simplified business expenses: Example
During 2018/19, you worked from home 150 hours a month for 10 months. However, in November and December, you only worked 40 hours a month (gotta have your rest right?).
You also paid £30 a month for a fixed line and broadband package.
HMRC’s current simplified business expenses rates are:
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and up||£26|
This means you can deduct £26 a month for the 10 months you worked 150 hours a month. As for the two months in which you worked 40 hours a month, you’d deduct £10 a month.
So: (26 x 10) + (10 x 2). This means you’d deduct £280.
To deduct the cost of your broadband and phone package, you’ll need to figure out the percentage of business use.
You’ve worked 1580 hours in 2016/17 (150 hours multiplied by 10 months plus 40 hours for two months). And there are 8760 hours in a normal year (24 hours multiplied by 365 days). So, your percentage of business use is 1580 / 8760 multiplied by 100, that is 18 percent.
This means you can deduct 18 percent of your yearly broadband bill: (£30 x 12) / 18%, that is £65.
How do I deduct my actual home office costs?
Unfortunately, HMRC don’t have a formula or exact method for this. They simply say that you have to divide your costs between business and private use in a way that is “reasonable.”
The most common way to go about this is to divide your total expenses by the number of rooms you use for business. You then multiply this figure by the percentage of time you use the room for business.
It goes without saying that keeping good records of your expenses is super-important. This will make it easier for you to calculate your use of home as office deduction. HMRC may also ask to see your records in order to make sure your claim is accurate.
What counts as a room?
Here again, HMRC is quite vague, describing a room as a “normal living space.” However, many accountants seem to agree that the kitchen, bathrooms and hallways do not count as rooms. This means only the living room, the bedrooms and the room you use as an office count as rooms for tax purposes.
You should also note that, while in theory you could claim a deduction on more than one room, this may attract HMRC’s unwanted attention.
Of course, you may have a perfectly valid reason to claim a deduction on two rooms. For example you might be a photographer and you’re claiming a dark room and an office. If, however, you simply like to work in different rooms to mix it up, it’s probably best to claim a deduction on just one room.
Even if you use a room mostly for business, it’s worth using it for personal reasons part of the time. For example, you could use it as an exercise room or hobby room. This is because, if part of your home is classed as a business space, you may have to pay capital gains tax on it should you decide to sell it.
Which expenses can I include a home office deduction?
HMRC allows you to deduct two types of costs: fixed costs and running costs.
Fixed costs you can deduct from your taxes include:
- The interest on your mortgage (you cannot, however, deduct part of the capital repayments)
- Council Tax
- Insurance (unless you have separate insurance for your business, in which case you can deduct the full cost)
- Repairs and maintenance
Running costs you can deduct from your taxes include:
- Heating, lighting and electricity
- Water and sewerage
- Phone and broadband
How do I work out my home office tax deduction using actual costs?
- Step 1: Tot up all your expenses for the year, from April 6 to April 5.
- Step 2: Divide your total expenses for the tax year by the number of rooms in your house. Remember that the kitchen, bathrooms and hallways don’t count.
- Step 3: Work out the business percentage of your use by dividing the number of hours worked by the total number of hours in the year (8760 hours in a standard year and 8784 hours in a leap year) and multiplying it by 100.
- Step 4: Multiply the answer in step 2 by the percentage in step 3.
Use of home as office calculation: Example
Let’s say you live in a three bedroom house with one living room, one kitchen and two bathrooms. You use one of the bedrooms as your office.
Based on our previous example, you worked 150 hours a month for 10 months and 40 hours a month for two months.
Your total expenses for the year (that is both fixed costs and running costs) totalled £15,000.
To calculate your use of home of office deduction, you’d first divide £15,000 by the number of rooms. In this case, you have four rooms, which means your expenses for the year are £3,750 per room.
You’ve worked 1580 hours in total, which means the business proportion of your expenses is 18 percent.
So, the total amount you can deduct from your taxes for using your home as an office is 18 percent of £3,750, that is £675.
Can I deduct office furniture and office supplies from my taxes?
Yes you can. However, you wouldn’t include these as part of your use of home as office calculation.
HMRC considers office furniture and other equipment you need for work, such as a laptop, to be plant and machinery. And this qualifies for the annual investment allowance. This means you can deduct the full amount you paid for it from your taxes, less any personal use, up to a limit of £25,000 per year.
Let’s say you bought a desk for £300. You use it for work 90 percent of the time and for personal use 10 percent of the time. So, you can deduct 90 percent of £300 from your taxes, that is £270.
You can also deduct office supplies such as pens, pencils, envelopes and other stationery as a business expense.
However, in order to do this, you’ll need to prove that you used them “wholly and exclusively” for business purposes. So, if you use a pack of envelopes partly for business and partly to send birthday cards to your friends, you won’t be able to deduct them (unless you count out the envelopes and claim only the cost of those you used for business).
I’m an employee who works from home. Can I claim a home office tax deduction?
Yes you can. However, the amounts you can claim are much lower than if you were self-employed.
Once again, there are two ways to go about this: a flat rate method and a method based on your actual costs.
HMRC’s flat rate for employees is £4 per week or £18 per month. This rate covers all expenses and applies irrespective of how many hours you work from home each month. This means that, using this method, you can only claim up to £216 per year.
The actual costs method works the same way as it would if you were self employed. However, you can only claim the additional costs you’ve incurred because you’re working from home.
Typically, this means you can only claim expenses such as increases to your heating, water and electricity bills or a rise in your home insurance premium. You cannot deduct a portion of your rent, mortgage interest, council tax or other home-related expenses, because you’d have incurred them anyway, even if you didn’t work from home.