Alternative Tax Break for Homeworking
Tax deductions for homeworking expenses for directors and employees who work from home are small, especially in light of recent hikes in energy bills. One common question we hear is, is there a more generous tax deduction option? The answer is, for many directors and senior staff, yes.
Homeworking directors and employees can get a limited tax and NI-free reimbursement from the employer for homeworking costs; £6 a week. If no reimbursement is received they can claim a tax deduction.
There’s no limit to the tax and NI-free payment or tax deduction, but it must relate wholly to business use. HMRC says, even if part of your home is devoted to business use, neither interest on your mortgage or rent, qualifies for tax relief.
LETTING INCOME VS JOB EXPENSES
There’s an alternative homeworking tax relief which can up tax and NI-free expenses. With agreement, directors and senior staff can charge the employer rent for homeworking purposes. Although rent is taxable, you can deduct household costs for the part of your home you let.
Tax deductions from rental income are less restrictive than for employment. You can claim a portion of mortgage interest or rent, allowing your employer to pay you an amount for homeworking tax and NI free.
Let’s say you’re a higher rate taxpayer, director of a limited and live in a six-bed rental costing £2,100 a month. You use one homeworking room, (1/7th of floor space). Under employment expense rules, the limited you work for can pay you a tax and NI-free payment of £6 per week (£26 per month).
If instead, you let the room to your limited for a rent equal to 1/7th of the rent (plus say £60 per month homeworking-related overheads, e.g. energy bills), that’s £360 per month and an extra tax saving of £1,600 a year (£360 – £26) x 12 x 40%). You can claim a tax deduction for whatever the company pays you, whether £26 or £360 per month.
The rent is taxable, but rules on expenses relating to letting income are more generous than job expenses. The tax and NI-free payment on rental is potentially much greater than the job expense relief.
Let’s Talk
If you need advice on renting the area of your home you use exclusively for work to your employer if a director or very senior employee, to benefit from a larger tax relief working from home, talk to our team on Let’s Talk.
