Director and employee expenses for those working from home are tax-deductible, but HMRC allows for only a small deduction, especially with rising energy costs. What can you do to get a more generous tax deduction?
Homeworking and tax
Employers may reimburse employees and directors who work some or all of the time from home for their homeworking expenses. Each week that you work at home, you will be able to claim £6 tax and NI-free. Tax deductions are available if no reimbursement is received. Tax and NI-free payments and tax deductions are theoretically unlimited, except that they cannot exceed household costs exclusively related to business. Use this link to get more details.
How it works in practice
Tax relief for homeworking expenses is severely limited by HMRC in practice. When part of your home is used exclusively for business purposes, HMRC will reject (since 2007) your claim for tax relief on the interest on your mortgage (or rent).
Good News: Alternative Deductions
There is an alternative which allows your company to pay you more tax and NI-free expenses. With permission from their employer, any employee can use it, but realistically, it is probably only suitable for directors and senior staff.
Tip. In principle, it’s a simple concept. Directors or employees charge their employers rent for the part of their home they use for work.
How does this save tax?
You may deduct household costs related to the part of your home you let from the rent you receive from your employer, even though the rent is taxable. The arrangement allows your employer to pay you a tax-free amount for homeworking because the rules for tax deductions from rental income are less restrictive than those for employment income, e.g. mortgage interest.
Example. Andy is a director of Acom Ltd, where he pays a higher rate of tax. He pays £2,100 per month for a six-room rental house. One room of his home, which occupies a seventh of its floor space, is dedicated to his work for Acom. Generally, HMRC will only accept employment expenses up to £6 per week (£26 per month). Instead, Andy could rent out the room he uses for work to Acom for a rent equal to a seventh of what he pays, plus £60 for other homeworking expenses, such as energy bills, making a total of £360 per month. Andy saves just over £1600 per year (£360 – 26) x 12 x 40%.
Tip. Acom can claim a tax deduction for whatever it pays Andy, whether that is £26 or £360 per month.
Practical Issues
When entering into a rental agreement with your company, there are several hurdles to overcome, such as obtaining the agreement of a landlord or lender, reporting rental income and expenses on your tax return, and possible capital gains tax consequences.
In Conclusion
If you use an area of your home exclusively for work, you can rent it to your employer. Rent is taxable, but since the rules relating to letting expenses are more generous than those for job expenses, you may be able to receive a much greater tax and NI-free payment from your employer.
UK-Accountant will be happy to assist with further advice on the above and provide free no-obligation consultation. Please contact us.
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Tax Implications of Working Remotely
Pension Error Warnings About Work Place Pensions