Directors Homeworking Allowance
Should I claim homeworking allowance as a director, or should my limited company rent from myself as an individual?
Homeworking allowance is when you claim back certain expenses to cover the costs incurred when working from your home. Your employer can pay this allowance, and this will reduce company profits and so reduce the corporation tax liability.
Examples of homeworking expenses include costs you would have incurred whilst working from home. Such as:
- Room space
- Gas and Electricity
- Phone Bills
You cannot claim mortgage capital, interest or rent on your home as these expenses would have been incurred anyway. The same applies to water rates.
Actual Cost Method
Step 1) Add the total allowable costs.
Step 2) Calculate the % of space used whilst working from home.
Step 3) Calculate the % of time spent working from home.
Step 4) Calculate the % to claim.
Step 5) Multiply the total allowable costs by the % you can claim to get the monetary value that you can claim.
As this is a much more complicated option, if you are interested in exploring this further please do not hesitate to get in touch with us here at PJCO and we can provide you with a template to help calculate this.
The Flat Rate Method
The flat rate method was introduced by HMRC to simplify the process of calculating a claim on an actual cost basis.
As of 6th April 2020 HMRC allows a flat rate of £6 per week or £26 a month in fixed expenses without the need for any receipts. (For previous tax years the rate was £4 a week or £18 a month).
LIMITED COMPANY PAYING RENT TO YOU AS AN INDIVIDUAL.
As an individual you can charge your limited company, to rent out your home office. This office must be owned by yourself, and a fixed amount should be set for rental payments each month.
Homeworking allowance actual cost method and HMRC flat rate method cannot be claimed within your accounts, as well as these rental payments.
The advantage of this is that you can decide how much to charge the company, and this will reduce company profits, and so reduce corporation tax.
Although, you as an individual you would need to declare the rental income received personally on your self-assessment tax return, and you can include any repairs and renewals to offset against the rental income that has been received personally. Tax will then be due on the profit at 20% if you are a basic rate payer, 40% if you are a higher ratepayer, or 45% if you are an additional ratepayer.
This is more expensive than the 19% corporation tax.
You should also be aware that there is a risk that if you sell your house, HMRC will deem the home office as a business asset and not your own residence. As such, there is a chance that capital gains tax will be due.
If you have any questions, please do not hesitate to get in touch.