Working from home tax deductions

When an employee works from home for some or all of the time, they may incur additional household costs such as heating and lighting. An employer can make payments to the employee tax-free and without any liability for NICs, to help to meet those additional costs.

Claiming expenses when working from home

If you work from home you may be able to claim some of the related costs as a tax-deductible expense. There are, however, some important things to consider.

In order to claim tax relief for the expense of working from home you need to actually use your home as an office or a workplace. If you work away and are claiming accommodation and travel for long periods at a time it could raise questions as to whether your home office is really used for work. It’s not enough to spend five minutes a week updating your records or completing your expense claims. If you cannot genuinely answer yes, it may be difficult to justify a home office claim.

If you are genuinely using your home as an office there are two methods for claiming tax relief on the costs, a fixed allowance or the actual costs.

Fixed allowance

The current fixed allowance is £4.00 per week/£208 per year, without obtaining any supporting evidence of the additional costs. You should ensure that any amount claimed is no greater than the additional costs incurred.

Actual Home Office costs

The amount you can claim should be based on an ‘appropriate proportion’ of the specific costs arising for light, heat, insurance, rent, rates and other household costs. This ensures a fair claim is made in respect of the space actually used and is far more satisfactory to HMRC than an approximate round sum claim. However they will accept reasonable additional household charges.

There are some potential pitfalls to be aware of though.

A dedicated room or work area is required and it should be furnished for business purposes. Using the dining table in the kitchen, for example, is not sufficient.

Arranging business insurance for the home contents used for the business is further evidence of a genuine home office. It is also useful in the event of an insurance claim for your business equipment or furniture.

If you make it clear that part of your home is dedicated for business use it may attract the attention of the local authority Valuation Office who could look to apply business rates. If the space is for "mixed use", personal as well as business use, then business rates should not be applied.

Usually your home is exempt from Capital Gains Tax when you sell it. If you sell your house having claimed that a proportion of it has been used for business purposes, HMRC may argue that a proportion of any gain should be subject to Capital Gains Tax. As with business rates, this should not apply if the room you use has mixed use, but could apply if you've created a dedicated office, for example, above your garage.

You should consider your insurance policies, mortgage and/or tenancy agreements, as often you will be asked to declare that your home is used solely for residential purposes. However, if you are running a small home office and take out business insurance for your business-related items, it should not be an issue.

You must be sure that your claim is genuine and necessary. You should only claim if the amounts involved are significant and if you genuinely do use a proportion of your home solely for running your business. You should be prepared to provide full calculations for any expenses claimed should HMRC enquire into your tax affairs.

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