How do you calculate working from home expenses for tax?

Types of expenses you can claim

Because you use parts of your home for business, HMRC allows you to claim back the costs of running your home as business expenses – in some cases.

However, it is important to note that HMRC explains you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost – the part that relates to you actually living there – and the business element.

Based on this, you can consider claiming for expenses like:

• Lighting
• Heating
• Utilities
• Telephone and broadband
• Water

You can claim the business proportion of your gas and electricity costs for lighting and heating in the room(s) you use for business.

You can also consider claiming on your telephone and broadband bills, but the calculation for this works a little differently. What you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.

If you use a lot of your home water supply for business, for example if you run a car valeting service, then you would need to apply to the water company for this to be separately charged. You could then claim the full cost of your water bill. But if you don’t use a significant amount of water for your work, you can't claim any of the cost for your business.

Simplified expenses for sole traders

If you’re a sole trader, you can use simplified expenses to calculate some of your business expenses. These are flat rates that are set by HMRC – they’re a simpler way of calculating expenses, instead of working out your actual business costs.

You can use flat rates to calculate costs like these:

• Business usage of your vehicles
• Using your home as a workplace
• Living in your business premises (eg if you run a guesthouse or a small care home)

But you’ll still need to work out the actual costs for the rest of your business expenses, including things like phone bills, internet and equipment costs, staff expenses and marketing expenses.

Actual costs for sole traders

If you prefer to work out your actual costs, you’ll have to calculate the total cost of running your home (including mortgage/rent and utilities) and then deduct the business proportion of those costs. It’s a lot more effort than simplified expenses, but it could mean a larger amount goes towards your claim.

For example, you have 5 rooms in your house and use one as a home office.

Your electricity bill for the year is £500. If all the rooms use the same amount of electricity, you could claim £100 as allowable expenses (£500 divided between 5).

Then work out how many days per week you use your room as a home office, and divide the allowable expense amount accordingly.

If you work from home 2 days per week, divide 100 by 7 and then multiply it by 2 to get your annual business electricity expense.

Home office expenses for limited companies

If you’re a limited company, there are two ways of working out your home office expenses.

• HMRC’s flat rate system
• A rental agreement between yourself and your limited company

HMRC’s flat rate for the additional costs of running your business from home allows you to claim £4 per week, which adds up to £208 for the year. You don’t need receipts to prove these expenses, and this fee can be included alongside anything else you are claiming.

If you do decide to rent your home office to your own limited company, you may be able to claim more than £208 every year. If you choose to do this, make sure you have a formal agreement in place between yourself (as the homeowner) and your limited company. Otherwise, HMRC could classify the rent you receive from your limited company as additional salary.

What about the rest of your allowable business expenses as a limited company?

Well, you can deduct any business costs from your profits before they’re taxed. But you have to report any item you make personal use of as a company benefit.