Maximise savings: Your ultimate guide to work-from-home tax deductions
If you’re working from home, you may be leaving money on the table by not claiming all your eligible work-from-home tax deductions. This article cuts through the jargon and lays out what you need to know: the criteria for eligibility, the types of expenses you can deduct, and the step-by-step process to make your claim. Understand your rights, calculate your potential savings, and get ready to tackle your next tax return with confidence.
Unlocking home office deductions
To unlock home office deductions, you need to designate a workspace in your home that is used strictly for business purposes. It could be a corner of your living room, a spare bedroom, or even a greenhouse or studio on your property.
The key is to ensure that this space is free of personal activities unless they are minor and incidental, similar to what would be acceptable in a standard office building.
Designating your workspace
The concept of a ‘designated workspace’ is a cornerstone of home office tax deductions. This space must be used exclusively for business purposes to meet the ‘exclusive use’ requirement. Therefore, it’s vital to establish clear boundaries between your work and personal areas, even when working remotely.
Calculating space usage
After designating your workspace, the next step is to calculate the business percentage of your home. This can be determined by measuring the square footage of the workspace and comparing it to the total area of the home.
Alternatively, if the rooms in your home are approximately the same size, you can divide the number of rooms used for business by the total number of rooms in the home.
This calculation is essential in determining the amount you can claim for tax relief.
Get in touch with one of Sleek’s many experts today!
Determining your eligibility for tax relief
Understanding your eligibility for tax relief is a critical step in this journey. To be eligible for tax relief, your employer must have mandated you to work from home for at least one day during the tax year, and you must have incurred additional costs due to working from home that your employer has not reimbursed.
The specifics of these requirements, as well as potential exceptions and limitations, will be explored in the following subsections.
Requirements for claiming tax relief
To claim tax relief for working-from-home expenses, you must meet specific requirements. These include having been required by your employer to work from home and having incurred additional costs due to working from home that your employer has not reimbursed.
Understanding the working from-home tax rules can help you maximise your tax relief on home expenses.
Exceptions and limitations
While many employees may be eligible for tax relief, there are exceptions and limitations to consider.
For instance, if your employer reimburses your work-related expenses, meaning that no personal expense has been incurred, you cannot claim tax relief.
You can still claim tax relief on the amount not reimbursed if your employer only partially reimburses you. This can help reduce your overall tax burden. Being aware of these exceptions and limitations is key to ensuring accurate and successful tax relief claims.
Essential utilities: What you can write off
In the UK, eligible utility bills for those working from home and seeking tax deductions include gas, electricity, and water. However, to claim a deduction on these bills, the expenses must vary with the amount of business use and be incurred solely from running a business.
Apportioning utility costs
When it comes to claiming deductions for utility costs, one must strictly separate business use from personal usage. This can be achieved by basing calculations on the percentage of the home’s area dedicated to business, alongside the actual utility usage for business activities.
This means, for example, that if your home office takes up 20% of your home’s total area, you can claim 20% of your utility bills as a business expense.
Communication costs: Claiming phone and internet
Another key area of work-from-home expenses that you can claim tax relief on is communication costs, specifically your phone and internet expenses. But how do you determine what portion of these expenses is for business use?
Let’s explore this in the following subsection.
Determining business use proportion
Determining the business use proportion of your phone and internet expenses is crucial to your tax relief claim. One way to do this is by reviewing your phone bills from several months to identify business calls and calculate their percentage concerning the total call volume.
For broadband expenses, the claimable amount can be determined by calculating the ratio of internet time spent on business compared to personal use.
Get in touch with one of Sleek’s many experts today!
Depreciating assets and equipment
When it comes to claiming tax relief, depreciating assets and equipment also come into play. Items like computers and office furniture, which are necessary for your job and primarily used for work, can be claimed as expenses. You can often claim tax relief on the full cost of substantial equipment like computers, as long as they qualify for an annual investment allowance.
Navigating self-employment tax deductions
If you’re self-employed, navigating tax deductions can be a bit different. You can claim expenses that are directly related to running your business, such as:
- stationery
- travel
- staff costs
- advertising
Understanding allowable expenses
For self-employed individuals, allowable expenses include:
- a portion of utility bills
- telecoms
- rent or mortgage
- interest
- council tax
These are considered essential costs necessary to keep the business operational. However, keep in mind that private purchases and costs such as entertainment, customer gifts over £50, and some legal fees are not allowable expenses for tax deduction purposes.
Simplified vs actual expenses
When it comes to claiming tax deductions, self-employed individuals can choose between using simplified expenses or calculating actual costs.
The simplified expenses scheme uses a flat rate to calculate allowable costs for working from home, providing a straightforward alternative to detailed calculations.
On the other hand, the actual cost method allows you to claim tax relief based on the actual expenses you’ve incurred while working from home.
Special circumstances: Temporary workplaces & additional costs
In some cases, special circumstances such as temporary workplaces and additional costs might come into play. A workplace can be considered temporary if you attend it for a task of limited duration or a temporary purpose, which may be outlined in your employment contract.
Moreover, if you are eligible for work-from-home tax relief, you can claim for certain additional costs, such as increased household utilities and business communication expenses.
Maximising mortgage interest and council tax benefits
If you’re keen on maximising your tax deductions, don’t overlook mortgage interest and council tax benefits. If a part of your home is used solely for business, you may be able to claim 20% of your mortgage interest as a business expense.
Similarly, a part of your council tax bill can also be claimed for tax deduction. However, it’s vital to ensure that the business part of your home also serves some domestic use to avoid Capital Gains Tax implications.
Keeping records and filing your claim
Once you’ve calculated your expenses and determined your eligibility for tax relief, the next step is to keep records and file your claim. This involves retaining receipts, invoices, and other documents that demonstrate your additional costs.
It’s also crucial to file your tax return and pay any liabilities by the deadlines to avoid fines.
Let’s delve into the specifics of calculating your tax relief amount, including how much tax relief you might be eligible for.
Calculating your tax relief amount
Calculating your tax relief amount accurately is crucial to your claim. There are two methods to calculate tax relief: the flat-rate method and the actual cost method. Let’s explore these methods in more detail.
Flat-rate method
The flat-rate method is a simplified approach to calculating tax relief. Using a fixed rate of £6 per week, you can claim a set amount without having to calculate the exact proportion of your allowable expenses. This method is particularly beneficial for those who want a straightforward and time-saving way to claim tax relief and achieve less tax.
Actual cost method
On the other hand, the actual cost method allows you to claim tax relief based on the actual expenses you’ve incurred while working from home. This method requires you to provide evidence of your additional household costs, such as:
- utility bills
- internet charges
- office supplies
- equipment purchases
This method might be a bit more complex, but it can result in higher tax savings if your expenses are significantly higher than the flat income tax rate.
Avoiding common pitfalls in home tax claims
As you navigate the process of claiming tax relief, it’s important to be aware of common pitfalls to avoid. One crucial aspect to keep in mind is the difference between tax relief and a tax rebate.
Moreover, personal expenses are non-claimable when working from home, and they must be separated from business expenses to avoid issues with tax claims. Let’s delve deeper into these pitfalls.
Personal vs. business expenses
Distinguishing between personal and business expenses is a critical aspect of tax relief claims. While business expenses like lighting and electricity specific to the office area and business phone calls are deductible, personal items like a Netflix subscription are not.
The home office space can accommodate personal activities as long as they are within the level of personal use that would be tolerated in a typical office environment.
Staying within claim limits
Another important consideration is staying within claim limits. Eligible employees can claim tax relief of up to £6 per week for working from home, and the maximum annual amount claimable without receipts is £312.
Claims exceeding £6 per week based on annual calculations require justification and must be supported by documentary evidence.
Changes in work-from-home tax rules
Tax rules are not set in stone and may change over time, so it’s important to stay informed about any updates.
As of 2023, many individuals may no longer be eligible for work-from-home tax relief if their employers have compensated for their expenses or if they do not have additional household costs due to working from home.
It’s crucial to stay updated with these changes to ensure you’re maximising your tax relief options.
How to submit your claim for tax relief
Once you’ve determined your eligibility and calculated your tax relief amount, it’s time to submit your claim. There are several ways you can submit your tax relief claim, including using the HMRC online portal, submitting a self-assessment tax return, or submitting a paper-based claim with Form P87.
We’ll delve into each method in the following subsections, assisting you in determining the best approach for your situation.
Claiming via the HMRC online portal
The HMRC online portal is a convenient and efficient way to submit your tax relief claim. To claim tax relief using the HMRC online portal, you’ll need to provide the date you began working from home and information about your employer. Once your claim is submitted, HMRC will review your information and adjust your tax code accordingly, ensuring you receive the appropriate tax relief.
Claiming through self-assessment tax return
Another option for claiming tax relief is through a self-assessment tax return. This method is typically used by self-employed individuals or those with other sources of taxable income. To claim tax relief through a self-assessment tax return, simply include your allowable expenses in the appropriate box on the employment page of the form. By doing so, you may be eligible for a tax refund.
Ensure you provide accurate information about your expenses to guarantee a successful tax relief claim.
Paper-based claims using Form P87
If you prefer a more traditional approach, you can submit a paper-based claim using Form P87. To do so, you’ll need to:
- Complete the form
- Submit the form by mail to HM Revenue and Customs (HMRC)
- Provide all necessary information, including your employer’s details and the expenses you’re claiming tax relief on.
Keep in mind that processing times for paper-based claims may be longer than online submissions.
Tips for Maximizing Your Tax Relief Claim
Following best practices is key to maximizing your tax relief claim. We will offer useful tips on maintaining accurate records of expenses, ensuring timely submission of claims, and seeking professional tax advice when necessary.
These tips will help you make the most of your home tax rebate and ensure you receive the maximum tax relief possible by understanding the tax rebate process.
Keeping accurate records of expenses
Keeping accurate records of your work-from-home expenses is key to a successful tax relief claim. Be sure to retain receipts, invoices, and other documents that demonstrate your additional costs.
Having a well-organized record-keeping system will make the claiming process smoother and increase your chances of receiving the maximum tax relief amount.
Ensuring timely submission of claims
Submitting your tax relief claim promptly is vital due to the strict deadlines for claiming tax relief. You may claim tax relief on expenses incurred in the relevant tax year. Generally, you can do this up to four years after the end of that tax year. By submitting your claim promptly, you’ll avoid missing out on any potential tax savings.
Seeking professional tax advice when needed
If uncertainties arise about your eligibility, calculation of your tax relief amount, or submission of your claim, seeking professional tax advice is recommended. A tax professional can provide expertise, identify applicable expenses, and help you navigate complex tax laws.
By consulting a tax expert, you can ensure the accuracy of your claim, maximize your tax relief, and understand when to pay tax.
Summary
In conclusion, maximising your savings through work-from-home tax deductions involves a series of steps—from designating a workspace and calculating space usage, to understanding eligibility requirements and calculating your tax relief amount.
While the process can seem overwhelming, with the right knowledge and resources, it can become a manageable and rewarding task. Remember, every pound saved today can contribute significantly to your financial health tomorrow.
FAQs
You can claim tax relief for working from home if you are required to do so by your employer, you live too far away from work, or your employer does not have the necessary facilities. This is applicable from the current tax year 2022/23 onwards and can be done through self assessment (SA) returns, online, or on a paper P87 form.
The HMRC working from home allowance for 2021/22 and 2022/23 is £6 per week, which will remain the same for 2023/24.
Eligible work-related expenses for tax relief include heating, electricity, business-related phone calls and necessary equipment.
To calculate your tax relief amount, you can choose between the flat-rate or actual cost method depending on your circumstances.
The deadline for submitting a tax relief claim is typically four years from the end of the relevant tax year.
