Who wants to pay too much tax? No one, right? Well, if you’re working from home and not claiming expenses, you will be doing just that. And what a horrible thought that is, right? In this episode of Whiteboard Thursday,
Nick Campion walks you through 7 ‘must-claim’ allowable expenses to lower your tax bill. So, if you are a sole trader, limited company, or an employee working from home – check this video out
Hi there, it’s Nicholas Campion here from 1st Formations. Welcome to another episode of Whiteboard Thursday, where we provide advice on a wide range of business and company matters.
So, if you want to keep up-to-date with our insights, advice, and inspiration, then hit that subscribe button. But for now, let’s get started!
Today, I want to walk you through how you can lower your personal tax bill while working from home with 7 ‘must-claim’ allowable expenses, regardless of whether you are working as a sole trader, a limited company or as an employee of another company.
But first things first: let’s explain what we mean by “allowable expenses”.
Allowable expenses are the essential costs that you need to spend to keep your business up and running. Fortunately, HMRC recognises this, and so allowable expenses are tax-deductible. That’s why they let you offset them against your annual tax bill.
You can claim these expenses in a couple of different ways:
If you’re self-employed and you complete a Self Assessment tax return every year, you’ll be able to tally up your allowable expenses for the year on your return. The total value of those expenses will then be subtracted from your business revenues for the year. The number that’s left is considered your profit – and HMRC will normally only tax you based on that profit.
For example, let’s say you’re a sole trader and you made £60,000, but you were able to claim £15,000 worth of allowable expenses. This means HMRC will only ask you to pay tax on £45,000 for that tax year.
But it’s really important that you keep records and receipts of all your business expenses. You don’t have to send those records in with your Self Assessment return, but you do need to have them stored away in a safe place just in case HMRC ever contacts you and asks for proof of your expenses.
If you are an employee and you work from home on a regular basis, either part or all of the week, you will normally be able to claim tax relief for the extra household costs that you’re going to incur.
This includes a lot of the same expenses you might fill in on a Self Assessment form (such as heating, water bills, or content insurance).
To make a claim – you’ve got two options:
- You can choose to claim £6.00 a week (£26/month) from 6 April 2020 onward, and you will not be expected to keep evidence of your extra costs; or,
- You can claim the exact amount of extra costs you’ve had to pay. But if you go for this option, you’ll need to keep evidence like receipts or invoices.
The government has a useful ‘Check if you can claim’ form on the GOV.UK website to help you work out if you are eligible to claim.
Before you start the claim process, you should ensure you have to hand:
- A recent payslip or P60
- Your National Insurance Number
- Your mobile phone
The ‘Check if you can claim’ form takes a couple of minutes to fill in – at which point you will be asked to create your Government Gateway ID (if you do not already have one). If you don’t have one, just complete the simple steps when prompted and you’ll have your ID number in just a few minutes.
OK, once you have your Government Gateway ID number, you will be able to make your claim. Simply answer the questions on the claim form as appropriate, and once you have submitted it, HMRC will usually make any adjustments needed through your tax code to provide you with the required tax relief.
If you are claiming for working from home expenses for previous years, bear in mind that you must claim within 4 years of the end of the tax year in which you spent the money.
OK: so we’ve covered what allowable expenses are and how to claim them. Now let’s talk about what you should be claiming.
Straight in at number 1 is your mortgage or rent
Costs that are associated with your business premises have historically always been tax-deductible, right? Well, it works the exact same way if your business premises or your office happens to be in your home.
If you rent your home or pay a mortgage, HMRC allows you to claim a portion of that cost as an allowable business expense on your annual tax return. The trick here is that you’ve got to work out how much of your mortgage or rent counts as an allowable expense.
For example, let’s say you’re working from home in a five-room house. For tax purposes, HMRC doesn’t count a kitchen or a bathroom as a room. If you’re using one room exclusively for work purposes, that means you’re using 20% of the rooms in your house for business.
As a result, you can then claim 20% of your annual mortgage or rental costs on your tax return. The exact same rule will then apply to your mortgage interest (but not to capital repayments).
Number 2 is your heating and electricity bills
Your energy bills will probably rise if you’re staying at home all day to work. Fortunately, you can claim a portion of those costs, too.
You’d normally calculate the percentage of your bills that you can claim as allowable expenses in the same way that you’d tally up your mortgage or rental claim. Simply calculate what percentage of your heating and electricity goes towards supporting your work environment.
For example, if you spend £150.00 a month to power your home, and you use one of five rooms in your home for work-only purposes, £30.00 a month of your energy bills would be considered an allowable expense.
Number 3 – your broadband bills
Let’s face it: in this day and age, it’s almost impossible to work from home without reliable broadband. It’s how a lot of office workers dial in and carry out their daily tasks, and it’s how a lot of small business owners advertise and make sales. That makes broadband a business essential – which also means that it’s an allowable expense in the eyes of HMRC.
But just like energy bills and your mortgage or rent, there’s a catch: you’re only allowed to claim for broadband expenses that are directly related to your work. So if you already had broadband prior to working from home, and you still use it often in a personal capacity, that means you can’t claim for your entire monthly bill.
You can only claim for the proportion of that bill that is directly linked to work.
Coming in at number 4 is your council tax bill
OK, so here’s one that a lot of remote workers forget to claim when they’re working from home. But if your business premises is your home, and you’ve got to pay council tax, that makes council tax a necessary business expense – or at least, a part of your council tax.
Again, HMRC operates the same rule on your council tax bill that it would apply to your utilities or mortgage. You can claim council tax as an allowable expense, but only insofar as it applies to your work.
The easiest way to determine this is to go back to the number of rooms scenario, that is, identify how many rooms you’re using exclusively for work purposes and then apply that to your council tax bill.
For example, if you’re paying £100 per month in council tax and you’re using one of four rooms in your flat exclusively as a home office, that means a quarter of your council tax bill is tax-deductible.
So far so good? Here’s number 5 – your mobile phone bill
Now that you’re working from home, are you using your mobile phone to make calls to employees, your boss, or clients? If that’s the case, you should be claiming part of your mobile phone bill as an allowable business expense.
People generally choose to go one of two routes when they claim for mobile phone use. They can either:
- claim only for the percentage of use that is only work-related; or,
- Set up a work-only mobile contract and claim that contract in its entirety.
Again, tread carefully here. If HMRC ever asks to see proof that your £50.00 a month mobile bill is for work purposes and they can clearly tell you’ve been using it for personal use, you might land yourself in hot water.
Number 6 – magazine subscriptions
Ok: so when you’re working in an office with other professionals, you may pass around trade publications. But when you’re working remotely, you can’t exactly pass around a magazine.
Fortunately, if you choose to subscribe to a work-related magazine on your own and pay the bill for it, the entire cost of that subscription becomes tax-deductible. But it’s important to note that you can’t claim a trade publication subscription if your boss has paid for it on your behalf.
And finally number 7 – contents insurance
A lot of homeowners take out contents insurance to protect items in their homes from loss or damage. But did you know you can claim a portion of the cost of your insurance policy back as an allowable business expense?
That’s right: if you’re working from home, a portion of your contents insurance (and other kinds of property-related insurance) turns into a necessary business expense. But just like utilities or CPD courses, you can only claim for the portion of your insurance costs that are linked to your work or your business.
And, there you have it!
So we’ve covered 7 allowable expenses that you can (and should) be claiming on your Self Assessment tax return wherever possible if you’re working from home.
You can even claim many of these expenses if you’re employed by somebody else and don’t submit a Self Assessment return. But the process works a little bit differently if you’re claiming these expenses as an employee.
Either way, all of these expenses are worth exploring. You’d be shocked at how quickly they all add up and how much they can lower your annual tax bill.
But don’t forget to keep records and receipts, and don’t take all of these allowable expenses for granted. Every once in a while, HMRC will change the rules around certain expenses or how much you can claim for certain things like car mileage.
So, when in doubt, you should always consult an accountant or contact HMRC directly to make sure that the items you’re planning to claim for are indeed allowable expenses.
If you have any questions about what we’ve covered today, please ask in the comment section below and we’ll be sure to get straight back to you!
In the meantime, be sure to subscribe to our channel to get more tips and tricks on limited companies, reporting requirements, tax obligations, and more. We’re always happy to help, and we can’t wait to hear from you.
Until next time, Cheerio!