In recent years, there has been a massive increase in the number of freelance workers and remote business founders. If Covid proved anything, it’s that businesses can operate and thrive without the need for an office or in-person workers, so more and more businesses are saving money by opting to operate with freelance workers.
What many people who work from home don’t realise is that they could, in fact, be claiming back some of their household costs. At Tax Driven, we have helped clients manage their finances and also understand the expenses that they can claim back, and in this guide, we will give you more insight into who is eligible and what can be claimed.
Keep reading to find out more.
Working from Home Tax Relief: Who Can Claim?
Not everyone can claim their expenses back on their taxes, unfortunately, but if you are a sole trader or freelancer, you can do so through your Self Assessment. Limited company directors can claim home-work expenses if these are incurred entirely and solely for business reasons, meaning that you can’t just claim home expenses that are unrelated to your business.
When paying tax, making the distinction between personal and business-related expenses can be difficult. If you are not sure of what is technically classified as ‘business expenses’, working with an accountant will allow you to develop a better understanding of what can and cannot be claimed back and help you manage your business accounts and taxation.
The Two HMRC Methods
When determining the money that you are eligible to claim back when filing your tax return, there are two methods that you can use. Both methods will ensure that you receive compensation, but they have differing rates of return and difficulty.
Flat Rate
Also known as ‘simplified expenses’, a flat-rate claim is the simplest method allowed by HMRC for claiming tax relief for working from home. This method uses fixed amounts rather than calculating the exact expenses of working from home and is often based on hours worked from home per month.
To use this method, you must work at home for at least 25 hours per month.
Though simple, using this method may mean you miss out on money you are eligible for.
Actual Costs
Using the actual cost method is slightly more complex than the flat rate method, which is why we always recommend working with an accountant to ensure accurate calculations.
This method requires you to calculate the precise proportion of your home’s utility and housing costs that are being used for business purposes, which is done by working out your total household expenses and then applying a fair proportion to your business.
Since it can be complicated to calculate and you want to avoid errors, we suggest consulting an accountant for your self-assessment tax returns to ensure you don’t miss any eligible expenses.
Self-Employed Home Office Expenses: What You Can Claim
Freelancers and at-home workers often make the mistake of thinking that everything they pay for in their property is tax-deductible, but that is not the case.
You can claim the following expenses:
Utilities
Utility bills such as heating, lighting and water can be claimed based on room usage and the hours worked. When you work from home, you use a lot more energy than you would if you were in the office from 9-5, so HMRC takes this into account and compensates you for a percentage of these costs.
Mortgage Interest and Rent
If you WFH, you may be able to claim back a portion of your rent or mortgage interest as a business expense on your tax return, reducing your taxable income.
Council Tax
If you are self-employed or a freelancer working from home, you can claim a proportion of your council tax as an allowable business expense through your self-assessment tax return. People often make the mistake of thinking that you can claim your whole council tax amount, but the amount you are able to claim back is often determined by dividing your council tax by the number of rooms used for business, or you can use a flat rate.
Internet and Phone
When working from home, you depend on your internet and phone to be able to do your job, and so a percentage of the amount you pay, representing business usage, can be partially deducted from your tax.
Repairs and Maintenance
This is another case where the deductions are really specific, and you can’t plan to completely redecorate the rooms in your home with the hopes of getting the money back from HMRC. However, if you do repairs that are crucial to you being able to use your property as a workspace, such as roof repairs, you can claim a portion of the costs back when filing a tax return.
Record-Keeping
At Tax Driven Accountants, we cannot emphasise the importance of professional bookkeeping enough, and ensuring that all income and outgoings are documented. If you wish to claim expenses from HMRC, it is even more important to keep accurate records to support your claims, which means that you need receipts and invoices for all the expenses you believe you can get tax relief for.
If you work with an accountant, they will take care of all your bookkeeping needs for you, so when it comes to making a claim, you’re properly prepared.
Freelancer Tax Deductions UK: How to Claim
How you claim expenses depends on the structure of your business, with sole traders and freelancers using a different method from limited companies.
Claiming Expenses as Sole Traders and Freelancers
You report this in your Self Assessment tax return under the ‘Business expenses’ section. You can choose to use the HMRC flat rate or input your actual calculated costs. This must be done annually before the 31 January deadline.
Claiming Home Office Expenses as a Limited Company Director
As a limited company, you cannot claim it personally through Self Assessment like that. Instead, your company provides you with a use-of-home allowance. You should agree on a rate with your accountant and ideally have a straightforward written agreement. The simplest option is HMRC’s approved £6/week rate, which requires no receipts.
Claiming Home Office Expenses UK: How Tax Driven Can Help
With this guide at your disposal, you should be better equipped to claim expenses on your next tax return.
Whether you’re a limited company director, sole trader or freelancer, having an accountant on your side to keep track of your expenses, complete cash flow projections and help you understand your tax responsibilities is something that we will always recommend to ensure that you are operating your business in the most efficient way while also remaining compliant with your tax responsibilities.
Want to work with an experienced accountant who can give you the advice and guidance you need when it comes to claiming expenses? Contact us today.
