Background

Working from home has been around for many years now, but the Covid-19 pandemic and especially the periods when we were in lockdown saw a dramatic increase in the number of people working this way.

Many people now do all their work from home or are “hybrid” workers who split their working time between home and company premises.

There are many attractions to working from home, including saving the time and cost associated with commuting and more flexible working hours, which can provide a better work/life balance.

Working from home is very different from working at company premises. There is no face to face colleague interaction, there are different distractions, new technology to support remote working and of course, the costs are different too.

On the plus side, there are savings associated with reduced commuting, not just fuel and transport fares, but also wear and tear on your own vehicle. Drinks and food breaks can be cheaper too.

However, there are some cost increases to take into account. Heating, lighting and power usage for work equipment will all be higher and if the company provides refreshments, these will have to be paid for while working at home. The energy costs are subject to seasonal variation and have seen exceptionally high inflation rates recently.

Employees and self-employed workers and business owners who work from home can claim some tax reliefs for costs associated with working from home, which are explained below.

Employees

Employees who have to work from home because there is no nearby office or their employer doesn’t have an office can claim tax relief. However, employees who choose to work from home cannot claim tax relief. It should be pointed out that in the increasingly common situation where space at the company premises is limited and there may be insufficient space for an employee to work there is still treated as choosing to work from home for tax purposes.

For employees who can claim tax relief there are two options for working out their claim. The first, and simplest option is a flat rate scheme, where the employee can claim tax relief on £6 per week (this has been the rate since 6 April 2020). For an employee paying basic rate tax (20%), they would be entitled to £1.20 per week in tax relief and this would normally be applied via a change to their tax code. We generally recommend this approach as it is simpler and required no supporting evidence for the claim.

The alternative approach is to claim tax relief on the exact amount of extra costs. To make this claim, the employee has to provide receipts to prove the exact extra costs. The claim can only include costs that are to do with work (e.g. business phone calls and energy for your work area) and cannot include anything that is used both privately and for work in the home (e.g. broadband service).

Self-employed / Business owner

If you are self-employed or a business owner working from home, then you can make a claim for tax relief on your home office costs. The claim must be on a proportional basis.

These costs can be added to any other running costs associated with your work and deducted from your turnover as part of the taxable profit calculation. Typically, you can claim for thigs like:

• Heating
• Electricity
• Council Tax
• Mortgage interest or rent
• Internet and telephone use

In order to make a claim you will need to establish a reasonable method for allocating costs to your self-employment or business. The most common way of doing this is to identify how many rooms you use for business and what proportion of the total rooms in your home this constitutes, then calculate the proportion of time you spend working from home. For example, if your home has four rooms and you use 1 for business, and work 5 days a week from home, and you wanted to claim for electricity costs, your calculation could look like this:

• Total annual electricity bill - £400
• Proportion of home used for work – 25% (1 divided by 4)
• Proportion of time worked from home – 71.4% (5 divided by 7)
• Tax relief claimed - £400 x 25% x 71.4% = £71.40

Please note, that if you use your tax-free “trading allowance” of £1,000, you cannot claim home office or any other expenses.

HMRC do also have a “Simplified Expenses” option for working from home. To use this system, you must keep records of the hours you work at home each month and then you can claim the appropriate rate:

• 25 to 50 hours worked at home - £10 per month
• 51 to 100 hours worked at home - £18 per month
• 101 and more hours worked at home - £26 per month
• Your annual claim can include months at different claim levels if your home working hours have varied

For expert advice on tax related to working from home or any other personal tax questions, call us on 0121 474 2683

Useful links:

• HMRC guide https://www.gov.uk/tax-relief-for-employees/working-at-home
• HMRC guide to expenses for the self-employed https://www.gov.uk/expenses-if-youre-self-employed
• HMRC simplified expenses checker https://www.gov.uk/simplified-expenses-checker