Tax benefits of owning a home based business

COVID-19 forced a lot of business owners to work from home rather than an office. And a lot of people found that the change was actually an improvement overall. 

Whether you have to work from home permanently, or you’re just doing it for the time-being, you should know about the tax benefits of owning a home based business. 

There are a number of tax benefits that will apply to home based business owners, meaning you can deduct some of the extra costs of working from home from your taxable income. 

Specifically, we’ll be talking about:

• Home running costs
• Equipment expenses – like equipment, staff, legal, and financial expenses

Of course, some of these aren’t exclusive to home based businesses. But they still apply, so they’re definitely worth knowing about. 

It’s worth mentioning up top that this kind of tax relief isn’t available if you choose to work from home, only if you have to. 

The relief allows you to claim tax relief on the extra costs you have to pay because of working from home. You can claim on things like:

• Your gas and electricity bill.
• Water bill.
• Business phone calls.

Remember, you can;t claim the whole bill, just the extra costs that are directly because of work. 

Figuring out how much you can claim can be tricky, so HMRC allows you to calculate your home running costs with 2 methods.

Simplified expenses are an easy way to claim tax relief, so it’ll save you a lot of hassle. But, because it’s a flat rate, you might not get as much relief as you’re fully entitled to. 

HMRC only lets you use simplified expenses if you work from home for 25 hours, or more, in a month. The rate you can claim depends on those hours. 

• 25 to 50 hours per month – you can claim £10 per month
• 51 to 100 hours per month – you can claim £18 per month
• 101 or more hours per month – you can claim £26 per month. 

These rates don’t include phone or internet charges. You have to claim these by working out the actual costs. 

This method is a little more time consuming. You’ll need to keep receipts for all your expenses then work out how much extra working from home is costing you. 

HMRC refers to this as an ‘apportion’ of the total running costs, meaning the figure needs to be a ‘fair and reasonable’ part of the whole costs.

The simplest way to do this is by figuring it out by room.

First, count the number of rooms in your house. (Maybe it’s 5, for example) Then, figure out which ones you use for business purposes. (1 out of 5) Add up how much work time you spend in those rooms. (about half the time – 50%)

In this case you’d start with the total costs of your home’s running costs (that you can claim), then divide by 5. That’s how much you’re spending on that room. 

Finally, you’d multiply by 50% to get a figure of how much your work time is costing for that room. 

It’s far from an exact science, but working out the true figure is so hard that most people use an easy shortcut like this. 

You’ll get different amounts of tax relief depending on which tax band you’re in:

• Basic tax rate – 20%
• Higher tax rate – 40%
• Additional tax rate – 45%

For example, if you claim tax relief on £10 per week for home running costs, then you’ll only get relief on a percentage of that £10.

• Basic tax rate – You’ll get £2 tax relief (20% of £10)
• Higher tax rate – You’ll get £4 tax relief (40% of £10)
• Additional tax relief – You’ll get £4.50 tax relief (45% of £10)

Although you’re working from home, you can still claim a number of business expenses from your taxable income. 

Unlike home running costs, business expenses are deducted in whole from your taxable income before your tax rates are applied. 

For example, if you earn £50,000 in a year, but you spend £10,000 on business expenses, then you’ll only have to pay tax on £40,000 (income minus expenses).

There are a lot of different business expenses you can claim. Here we’ll cover some of the common expenses that can be claimed when working from home.

Even though you’re working from home, you can still claim your equipment as a business expense. You can only claim tax relief on equipment if:

• you need it to do your job
• you use the equipment for work and there’s no significant private use

Working from home, some of the equipment you can claim as a business expense includes:

• Stationery
• Work phones
• Computers
• Printers (including ink and cartridges)
• Fax machines
• Computer software

Remember, to count as a business expense it has to be exclusively for business. If there’s something you use for both work and personal reasons, you can’t claim the cost of it as a business expense, but you can claim back some of the running costs. 

For example:

• You can’t claim the cost of a private vehicle, but you can claim back petrol on an apportion basis. In other words, how much petrol you’ve used for work. 
• You can’t claim the cost of a personal phone, but you can claim some of the costs if you use it for business calls also. 

If you employ any staff, you can claim their wages as business expenses. This includes:

• Employee and staff salaries
• Bonuses
• Pensions
• Benefits
• Agency fees
• Subcontractors
• Employer’s National Insurance
• Training courses related to your business

As long as they’re necessary for running the business, you can claim the costs of:

• Hiring accountants, 
• Hiring solicitors, 
• Hiring surveyors. 
• Hiring architects.
• Professional indemnity insurance premiums.

• Bank, overdraft and credit card charges.
• Interest on bank and business loans.
• Hire purchase interest.
• Leasing payments.
• Insurance policies and premiums.

You can’t claim tax relief on::

• Legal costs of buying property and machinery.
• Fines for breaking the law.
• Bank, credit card and other financial charges.
• Repayments of loans, overdrafts or finance arrangements.

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.
Find out more here.