Claiming costs of working from home is effectively “rent of office space” and it is a very tax efficient way of extracting some money from your Company.
There are two different ways you can do this.
You can simply claim £4 per week which is a HMRC guidance rate. However this only totals £208 in a full year. The alternative method is to calculate a fair proportion of your home running costs.
The process for this method is:
Firstly work out what your actual running costs of your home are. If you own a property this can include mortgage interest but not capital repayments. If you rent then it is simply the rental charge. Other costs which you need to capture are Gas, Electricity, Insurance, Service Charges, Cleaning and Council tax.
New rules around property interest relief for higher tax earners came into in April 2017 so if your earnings are above the basic tax band you will have to adjust your mortgage interest in your ‘use of home as office’ calculation accordingly. More info can be found on the changes here
You then need to work out what proportion of these costs would be fair to allocate to your business. The simple way of doing this is to firstly work out how many rooms you have in your house excluding bathrooms, kitchens and hallways. You then need to work out what % of the time you use one of the rooms for business use. Let’s assume you use one of your rooms as an office and 50% of the time that it is in use it is used for your contracting work. Let’s then assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens. If your total running costs of your house per year are £15,000 it would therefore be justifiable to charge £1,500 per year (50% x 1/5 x £15,000) to the business as rent.
- For the cost to be allowable as a deduction for corporation tax in your companies accounts the charge must not be above what might be considered to be a fair market rent. You should therefore get a few local prices and save them as back up to your calculation.
- You should document something official between you personally and your Company to confirm that you will be charging the Company rent. The most common way of doing this is by drawing up a simple license agreement.
- From a personal perspective you are actually generating rental income from your business, however because you have allocated only a fair proportion of your running costs, your rental costs will be the same as your rental income, so there is £nil rental profit.
You shouldn’t use your office room entirely for business use – keep at least a small element of the room for personal use as this protects you from any potential capital gains tax issues.