It’s January, so the heating’s cranked up full blast and you’re having to work with the lights on. Most contractors and freelancers are aware that they can deduct expenses for running a home office from the profits of their business, but what exactly are allowable costs? This blog gives a quick rundown of the main things to consider and how to work out the numbers ahead of filling in your self-assessment return.
Exactly what you can claim depends on your business, your bills and how much and how often you work from home. We’d always recommend sitting down with a qualified accountant to help you crunch these numbers. But here’s an idea of some of the expenses that you might be incurring in the course of running a home office.
Actual costs method vs simplified business expenses method
The first thing to decide is which method will be better for you to use to calculate your expenses. There are two broad ways to work out the costs of running a home office:
- Actual costs method – as the name suggests, this method involves trying to work out the actual costs of running a home office, taking into account things like rent/mortgage interest, heating, electricity, council tax, telephone and broadband. This method may be more accurate but costs are more time-consuming to estimate and detail.
- Simplified business expenses method – if you work from home more than 25 hours a week, HMRC has set flat rates that you can claim for running a home office, based on how many hours you work from home. This method is less accurate but is far easier to calculate. It doesn’t include expenses for telephone or broadband, so if you opt for this method, remember to add them on as well using actual costs methods.
HMRC have a special online tool for you to check if you will be better off using simplified expenses: https://www.gov.uk/simplified-expenses-checker
Working out costs
If you decide to go down the actual costs route, you will not only need to know how much you spend on things like electricity or broadband, but you will need an accurate idea of a) what proportion of your home you use for business purposes and b) how many hours a week you work from home. For example, if your house has six rooms, and one of them acts as your home office, you might start by dividing whole house costs by 6. Most accountants don’t count hallways, bathrooms and kitchens as rooms. Remember, any part of your home that you use solely for business purposes may be liable for capital gains tax. For this reason, many people have their home office serve a dual purpose, such as a library, music room or leisure space.
Then add up the costs. Costs that you might incur on a home office include:
- Rent or the interest on mortgage payments (not the capital repayments)
- Council tax
- Repairs and maintenance
- Heating, lighting and electricity
Work out the annual costs of these expenses and then divide that number by the number of rooms you have to get a figure that covers just the room that you use for your home office. Then you’ll need to work out how many hours you work from home per year, and express this figure as a percentage of a full year. Then you can multiply the costs by this percentage to get an estimate of your home office expenses. Phew! Well, we did say this method was more time-consuming!
Remember, if you have business insurance through Kingsbridge, this is fully tax deductible as it’s 100% a business expense. Give one of our friendly team a call today on 01242 808740 to discuss our specialist cover for contractors and freelancers.