Since the COVID-19 pandemic, the number of British employees and business people who work from home (WFH) has risen substantially. In part, this was due to the realisation that many roles could be performed from home without any negative impact while offering workers an improved quality of life. Now that the pandemic is far behind us, many have returned to their normal place of work on a full-time basis or switched to a hybrid working model, working from home and from the office. Unfortunately, many home workers are still unaware of the expenses that they can claim to significantly reduce their tax liabilities. In this article, we will explain the main allowable working-from-home expenses that you can claim and how to claim if you are employed, self-employed, or run a limited company.
What is an allowable expense?
‘Allowable expenses’ are the essential business costs of running a business that can be offset against a tax to reduce your annual tax bill. In essence, because the cost is incurred by and for the business, HMRC does not expect you to pay tax on it. For example, if you run a business with a turnover of £40,000 and submit a claim for £10,000 worth of allowable expenses, you will only need to pay tax on your taxable profit of £30,000.
Essential business costs include clothing, marketing, office costs, travel costs, and training courses. You can also claim a proportion of certain costs if you work from home, including council tax, electricity, heating, internet and phone. It does not, however, include any money that you take from your business to fund purchases for yourself.
If you run a limited company rather than being self-employed, different rules apply. You can deduct business costs from your profits before tax, but you must report any item you also make personal use of as a company benefit.
Can I claim working-from-home expenses?
If you work from home, you may be able to claim allowable expenses to reduce your tax bill if you are employed, self-employed, or you own a limited company. For employees, the HMRC rules state that you can claim tax relief if you have to work from home or if you use your own money for items that you must buy for your job, as long as these are only used for your work. You cannot claim tax relief on expenses related to work if your employer gives you all of the money back or if you simply want an alternative to what your employer has provided for you (e.g. a better mobile phone or laptop). You also cannot claim relief on business expenses if you choose to work from home.
The exact rules on who can claim and the expenses that can be claimed vary depending on whether you work for an employer or yourself. Your employer or accountant should be able to advise you on the deductions you can claim and how to do so.
Deductible expense #1: Mortgage interest or rent
You may be surprised to know that you may be able to claim some of your mortgage interest (not your mortgage capital) or rent against your taxes if you are self-employed and work from home. The amount that you can deduct as an allowance expense is normally based on the number of bedrooms in your house. If you have, for example, four usable rooms in your house (not including your kitchen or bathroom, which are not considered useable spaces), one of which is used for your office, you can claim 25% of your total annual mortgage interest or home rental costs when you submit your self-assessment tax return.
Deductible expense #2: Internet costs
If you use your home broadband for business use, you can offset some of this against your tax because it is considered an essential business cost. If you already have broadband at home and you start using this for work purposes as well as for private use, you can claim a proportion of the cost.
To make a claim, HMRC expects you to work out the proportion of time spent using the broadband for business purposes and that used for personal use. The proportion used for business use can be used to offset your tax bill.
Deducible expense #3: Council tax
Many people are surprised to know that they can deduct some of the cost of their home council tax from their tax bill. If you are self-employed, HMRC will generally allow you to offset an amount of council tax based on the number of usable rooms in your house and how many of these are used for working from home. So if you pay £240 per month in council tax, and you have four useable rooms, one of which is used as an office, £60 of this is tax deductible.
Deducible expense #4: Home contents insurance
As a home worker, HMRC may allow you to deduct some of your home contents insurance bill (and other kinds of property-related insurance) from your tax liability. If you are self-employed, your home contents insurance policy should cover your home-office equipment up to a certain value in the event of theft, loss and damage. That said, if you work for an employer, your work laptop and other equipment should be covered by their business insurance.
Deductible expense #5: Mobile phone
Smartphones are increasingly essential for business. If you use your personal mobile phone to make business calls, including those to customers and colleagues, you can claim part of your bill as an allowable expense. Again, you will need to work out the split between your personal and business use and claim the latter.
Deductible expense #6: Subscriptions
If you are self-employed, you may be able to claim the cost of any trade or professional journals that you pay for and trade body or professional organisation membership. The HMRC rules state that you cannot, however, reclaim payments to political parties, gym membership fees, and donations to charity.
How can I claim my tax-deductible business expenses?
The method of claiming your tax-deductible expenses will depend on whether you are an employee, self-employed, or run a limited company:
Employee
If you are employed, you can claim your allowable expenses online through HMRC. The website will guide you through the process and will first ask you to select the type of expenses you are claiming: working from home, uniforms, work clothing and tools, vehicles used for work, travel and overnight expenses, professional fees and subscriptions, buying other equipment, and other expenses. HMRC will advise you based on your answers on whether you can claim, how much, and the method for reimbursement. This may be by adjusting your tax code or increasing your personal allowance so you pay less tax.
You can claim tax relief on:
- £6 a week, and you will not need to keep evidence of your extra costs or
- The exact amount of extra costs you have incurred above the weekly amount, but you will need evidence such as receipts, bills or contracts.
You will get tax relief based on the rate at which you pay tax.
Self-employed
If you are self-employed, you can claim expenses such as office, property and equipment, car, van and travel expenses, clothing, staff expenses, reselling goods, legal and financial costs, marketing, entertainment and subscriptions, and training courses. This can be done through your annual Self-Assessment tax return. You will need to add up all of your allowable expenses for the tax year and write the total amount on your Self-assessment tax return form. You do not need to send evidence of your expenses, but it is important to keep copies in case HMRC request them.
Limited company
Most limited company business expenses can be deducted from your profits, which will reduce your company’s corporation tax bill. Business expenses can either be paid directly from your company’s bank account or paid from your personal account and reimbursed by your company.
If the expense is in your company’s name and relates to something that is only for business use, you can claim the entire cost. On the other hand, if the bill is not in your company’s name, you will need to work out how much it is for business use only.
It is important to keep accurate records for all of your allowable business for six years. Your company accountant will be able to explain the allowable business expenses that can be used to reduce your Corporation Tax and ensure these are correctly reflected in your company’s accounts.
Final words
We hope that this guide has given you a flavour of the type of expenses you can claim. The rules on claiming expenses to reduce your tax liability can be quite complex and vary depending on whether you are employed, self-employed, or run a limited company. To ensure that you are claiming the expenses that you are entitled to and that this is done correctly, it is important to engage the services of a professional, experienced and trusted accountant. By claiming all of your allowable expenses, you can reduce your HMRC tax bill considerably. Remember, always keep your business-related expense receipts. Doing so will ensure that you claim everything that you are entitled to and you have the evidence to provide to HMRC in the future if ever needed.
