Your company can reimburse you for a flat rate weekly payment of £6 (£312 per year) – if you meet the criteria for working from costs.
Your company reimburses you the tax exempt amount of £6 per week or £26 a month
In order for your company to make the tax-exempt payments, you must have an arrangement with the company where you regularly work at home.
In addition, you do not need to maintain any records if your company pays you the flat weekly allowance of £6 (or £26 a month).
HMRC guidance can be found here
What if your company doesn’t reimburse you the flat rate weekly payment of £6?
For employees who don’t reimburse their employees with the flat rate weekly payment of £6, then you may be able to claim tax relief on £6 a week or £312 a year for the cost of light, heat etc. for your workspace. This isn’t as beneficial as getting the full amount paid by your employer as you are only getting tax relief on the amount claimed. For example, if you want to claim the tax relief on £312 and you pay tax at a rate of 20% in that tax year, you will receive tax relief of £62.50 (20% of £312).
To claim tax relief, you must be required to work from home- this is more restrictive than just having a regular homeworking arrangement in place. However, it would apply if it is written into your contract that your place of work is your home or if you are obliged to work from home because your employer doesn’t have available office space. You cannot claim tax relief if you choose to work from home. This includes if:
- Your employment contract lets you work from home some or all of the time.
- You work from home because of COVID-19.
- Your employer has an office, but you cannot go there sometimes because it’s full.
Therefore, if you are now working from home more regularly but this is your choice, you won’t be able to claim the tax relief from 6 April 2022.
What if tax relief on £6 a week or £312 a year isn’t enough to cover the extra cost of your bills?
Employers may reimburse employees for the additional household expenses incurred through regularly working at home. The relief covers, for example, heating and lighting costs, additional insurance, metered water, telephone or internet access charges.
Costs must relate to the work area of the home. Costs that are the same, whether or not you work at home, cannot be included. Specifically this includes mortgage interest, rent, council tax and water rates.
This would mean calculating the total cost of your utility bills and then identifying the work related proportion of those costs- of course, it could mean a larger amount of tax relief than the £312 per year.
HMRC does not provide exact guidance on how this calculation should be done – but must be on a fair and reasonable basis.
For example, you have 5 rooms in your house and use one as a home office for 8 hours a day (your family use it to watch TV in the evenings). Your gas and electricity bill for the year is £4,000. Your starting point would be £800 (£4,000 divided between the 5 rooms in your house). If you work full time, you typically have 230 workdays in a year (365 less weekends and holidays) so divide 800 by 230 and then multiply it by 365 to get closer to your actual annual work expense (£504). To take into account the room is used for a few hours each evening for your family to watch TV, you would further prorate it by 8/10 hours (say), giving you £403. More importantly, if you wish to claim expenses you need to retail a copy of your household bills and workings.
Can you draw up a formal rental contract with your own company?
Alternatively, you may opt for a third option – drawing up a rental licence between you and your own limited company.
This must be a commercial agreement, based on your real working arrangements, and ‘market rent’ must be paid- most importantly, you should be able to justify the amounts involved. You could include a pro-rata amount of your mortgage/rent here too.
Although your company will receive tax relief on the rental payments, you will incur personal tax on the rent received when you fill in your annual self-assessment return. There are legal aspects you should consider too – could a rent agreement invalidate your mortgage/insurance agreements? There are also tax implications with treating your room as exclusively for business too.