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Tax deductions for working from home

Because more people are currently forced to work from home due to the coronavirus pandemic we thought we'd cover the available tax deductions for working from home. In this article we'll cover the tax relief available whether you run your business as a sole trader, partnership or limited company

Tax deductions for working from home

If your business has essentially become home based then you might be considering building an outside office or converting part of your home. If that's the case what expenses can you claim and what are the tax implications?

Construction or conversion costs

This type of expenditure will generally be treated as capital expenditure and thus not deductible for corporation or income tax purposes regardless of who incurs them. 

However any modification or conversion might include some expenditure which can be treated as repairs and renewals. For example, redecorating, replacement of old floors or windows, or floor coverings. 

What happens if the business owner incurs these costs personally?

Your property potentially qualifies for exemption from capital gains tax if it is regarded as your main residence. However a restriction applies where part of your home is used exclusively for business purposes

If part of your home is converted into an office of part of your garden is used for business (for example because an outside office is constructed) this should still qualify for the exemption provided there is non exclusive business use.

If main residence relief is restricted because of exclusive business use then the proportion of the gain on the property relating to business could potentially qualify for entrepreneurs' reliefHowever relief for this part of the property will not be available if this has been let to your limited company.

Generally speaking there is no capital gains tax advantage in claiming for these costs unless property prices are falling

What about fixtures and fittings?

You will be able to claim capital allowances using the annual investment allowance for any fixtures or plant and machinery (e.g. desk) which is used to convert or create a home office. If you are a director of a limited company it would usually make sense for the company to incur the cost of purchasing any plant and machinery

The position is a little less straight forward where fixtures are purchased by your company. HM Revenue are likely to take the view that the company cannot reclaim VAT on the cost of an item that is essentially fixed to your personal property. It might also be argued that there is some private use of a fixture by  a director which in turn could trigger a tax and national insurance charge.

Repairs and renewals

If you're a director you'll usually be able to claim the cost of any repairs or renewals as a tax deduction against any rental income received from your company though only that relevant proportion that is attributable to business use. If you're a sole trader or partner the deduction would be made against your business profits.

You would normally calculate this proportion on the basis of the number of rooms in your property, floor space and periods use for business.  

What if my company pays or reimburses any conversion costs?

If your company pays for any conversion costs in your home, strictly speaking these are your personal liability. HM Revenue are likely to regard these as earnings which are subject to both income tax and national insurance and potentially reportable on form P11D. The charge arises in the year in which your company incurs the cost. The tax and national insurance charge can be avoided if you reimburse your company for these costs. Alternatively if you have sufficient credit balance on your director's loan account any costs can be offset against your loan account. However we would recommend formalising this before the expenditure is incurred.   

What if my company pays or reimburses any construction costs?

If your company pays for the construction costs of a home office in your garden which is available for private use there will be a taxable benefit. This is based on the construction cost (though see below) less any amounts paid personally by the director (see above). The tax and national insurance liability arises in the year of construction. There is no other subsequent tax charge if the home office is used privately. However you will be taxed on the value of any ongoing benefit paid for by the company for example heat and lighting.   

If your company operates in the building trade then the construction costs (for calculating the taxable benefit) will be the higher of the following:   

  • The salaries of the employees working on the project
  • The cost of any contractors used to fulfil the director's normal duties whilst they work on this project

Additional assets purchased by the company

If your company purchases additional assets for the home office such as Hi Fi equipment, paintings or a TV satellite dish which are used privately there will be an ongoing taxable benefit in kind for each year the asset is made available. The taxable benefit is calculated at 20% of the higher of purchase cost or the actual annual costs incurred by your company.

What about the Stamp Duty and VAT position?

If you are not registered for VAT as an individual (for example as a company director) then you would not be able to recover the VAT on any construction costs for an outside office. However if you could consider registering for VAT and opting to tax the building. This would allow you to reclaim VAT on any associated costs.

Stamp Duty Land Tax is usually charged at residential rates when an individual sells their home provided it is suitable for use as a dwelling on the date of sale. If part of the property is not suitable for residential use then the mixed use Stamp Duty Land Tax provisions apply. Generally speaking HM Revenue considers 'outhouses' to be treated as residential unless they have a specified non-residential purpose.

Tax Refund claims for home workers’ office equipment – how do you make a claim and what is it?

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  • Millions who are now working from home are entitled to claim for certain items
  • This could include study chairs, desks and stationery, printer paper and ink
  • These claims are made through P87 forms which are given to the taxman 

HMRC has been 'inundated' with claims from employees working from home during lockdown who are taking advantage of little known tax relief for office desks, chairs and printer ink.

Millions of people who are now working remotely due to the coronavirus pandemic are entitled to claim tax relief for items they say are 'wholly, exclusively and necessarily' to successfully do their job.

This could include study chairs, desks and stationery, printer paper and ink.  

Online furniture store Wayfair has noted a 200 per cent increase in searches for home office items in the UK in the past month, with desks, bookcases and office chairs becoming best-selling items

These claims which are made through P87 forms given to the taxman, were not commonly used before the pandemic and were only accessible if an employer agreed an employee was required to work from home and not just because they wanted to.   

But now the lockdown has opened the floodgates to claims, which could be worth hundreds of pounds of tax relief being paid back to employees. 

The amount of tax relief for office equipment will be the same as the level of income tax rate you earn at work. 

How to make a claim

If you are self-employed, you should claim for your working expenses as normal through a self-assessment tax return. 

If you're employed — and you have expenses of up to £2,500 per year — you should submit a P87 form. 

For bigger sums, you will also have to submit a tax return. 

A P87 form can be downloaded on the Government Gateway website and sent to HMRC online or by post.  

HMRC is likely to be very busy with claims so workers could claim online to save time. 

You have four years from the end of the tax year to make a claim. 

If it is successful, HMRC will pay you by cheque or adjust your tax code. You will not have to submit receipts with the P87, but keep them as HMRC may want to check them.

For example, a basic-rate taxpayer who claims £1,000 of allowable expenses will receive £200 - which is 20 per cent of what they spend on equipment.

If you are a higher vrate taxpayer (40%) and you buy £2500 in allowable working from home items - you could cliam a tax refund of £1000

Employers should watch out for people buying items for personal use as HMRC says items must be for employment duties - which is difficult to prove.   

Therefore purchases like clothing, broadband or a laptop won't be accepted by HMRC as they are used in every day life as well as work.   

HMRC told The Times it had no precise figures on the number of P87 claims it had received, but agreed that the volume had increased significantly.

Want a refund without the hassle? Get in touch with us if you want us to complete the form for you.

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What can a tax investigation cost my business?

Tax investigations can be incredibly costly, with various elements adding up to create a financial headache for small business owners.

We explain where the different fees can come from, and how your business can protect itself from running into financial difficulty as a result of a tax investigation.

What can a tax investigation cost my business?

Time

While it might not seem like a financial cost at first, a tax investigation can eat up a large portion of your time which will have a cost implication.

You will often be called upon to provide additional information during the investigation, working alongside accountants and other financial specialists to respond to requests. Completing these tasks  can keep you away from your business.

If you’re part of a small team of salespeople or a sole trader for example, this could severely hamper your business and your ability to work -  your ability to sell, offer services to customers and, ultimately, make money.

Putting steps in place to help protect your business can help you get through this process smoothly and help to keep your business afloat during a tax investigation.

Tax repayments

A tax investigation is carried out to  calculate if  you owe any money to HMRC and how much that is. That repayment can vary depending on the findings of the investigation.

You  should also be aware that any repayments you make could be subject to additional fines – especially if the errors in your original tax return were found to be avoidable or deliberately misleading.

Penalties are based on the reason for the error occurring, such as late or inaccurate payments. More serious reasons can incur a much  higher penalty.

For example, if you have provided a tax return that contains a deliberate error, you could be asked to pay a penalty that ranges between 20 and 70% of the extra tax you are required to pay.

This is why accuracy is so important when reporting your finances. Should you owe a large amount in back taxes, then be required to pay a large additional penalty on top of that, because of providing inaccurate information, this could potentially cause problems with your business’s finances.

Additional fees

On top of back pay and penalty fees, you should also take into consideration the additional cost of getting help to deal with your tax investigation.

You might need a specialist to help you work through financial issues in a certain area. This could include a VAT specialist to help you calculate whether you made accurate payments or not.

You should also factor in the general accountancy bills that might build up through the investigation. In some cases, these additional fees can be significantly more than the amount you’re being asked to pay HMRC.

These additional fees, penalties and back payments can mean that your business stands to take a significant financial hit at some point. This can cause a great deal of stress, especially in a lengthy investigation where you’re waiting on a final fee from HMRC, all the while utilising an accountant who has on-going fees to be paid.

How Tax is calculated

Income tax

Income tax is a tax on income including:

  • earnings from employment, including benefits in kind such as a company car
  • earnings from self-employment
  • most pensions income, including state, occupational and personal pensions
  • some social security benefits
  • interest on most savings
  • income from shares (dividends)
  • rental income
  • income from a trust

You won't usually have to pay tax on all your income, even if it's all taxable, because you'll be entitled to a certain amount of income tax free every tax year. The tax year runs from 6 April one year to 5 April the following year.

There's no minimum age when you have to start paying income tax. What matters is the amount of your taxable income. If this is below a certain level, no tax is payable.

Check how much income tax you'll pay

You can estimate your income tax for the current tax year on GOV.UK. You can’t use the calculator if you’re repaying a student loan or contributing to a pension through your employer. 

There are other online calculators you can use to estimate your income tax if you’re repaying a student loan or contributing to a pension. They include:

Income tax calculators can only give you an estimate - if you have questions about your income tax, contact HM Revenue and Customs (HMRC).

HM Revenue and Customs Taxes Helpline
Tel: 0300 200 3300 (Monday to Friday from 8.00am to 8.00pm; Saturday from 8.00am to 4.00pm)
Textphone: 0300 200 3319

Calls usually cost up to 40p a minute from mobiles and up to 10p a minute from landlines. It should be free if you have a contract that includes calls to landlines - check with your supplier if you’re not sure.

Income that's not taxable

Some income is not taxable, which means you don't have to pay tax on it - for example, Housing Benefit, Child Benefit and lottery winnings. The government ignores this income when working out how much tax you have to pay.

Paying tax on foreign income

You might need to pay UK income tax on foreign income, for example:

  • wages if you work abroad
  • foreign investments and savings interest
  • rental income on overseas property
  • income from pensions held overseas

Foreign income is anything from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign.

Whether you need to pay depends on if you’re classed as resident in the UK for tax. If you’re not a UK resident, you won’t have to pay UK tax on your foreign income. If you’re a UK resident, you’ll normally pay tax on your foreign income. But you may not have to if your permanent home (domicile) is abroad.

Read more about paying tax on foreign income on GOV.UK.

Tax allowances

The amount of income tax you pay depends on how much of your income is above your 'Personal Allowance'. This is the amount of income you don’t have to pay tax on.

Check how much your Personal Allowance is on GOV.UK.

Your Personal Allowance may be bigger if you’re entitled to Marriage Allowance or Blind Person's Allowance. If you earn more than £100,000 a year, your Personal Allowance is smaller.

Read more about Marriage Allowance and Blind Person's Allowance.

If you're an employee or pensioner who pays tax through the Pay As You Earn (PAYE) scheme, your personal allowance will be spread throughout the year. This means every week or month you’ll have a certain amount of tax-free income and pay tax on the rest.

If you’re self-employed or have other taxable income not taxed through PAYE, your personal allowances will be taken into account when your tax bill is calculated. Your tax bill is calculated after you submit your annual tax return or repayment claim.

Tax reliefs

You don’t have to pay income tax on some work-related expenses - for example, if you need to spend money on uniforms or travel for work. This is called ‘tax relief’. 

Your tax relief is applied in the same way as your personal allowances. If you’re employed, your tax relief is spread throughout the year. If you’re self-employed, or you have other taxable income, your tax relief is taken into account when your tax bill is calculated. Your tax bill is calculated after you submit your annual tax return or repayment claim.

Read more about tax relief and find out how to claim on GOV.UK.

Income tax rates

You’ll be taxed a percentage of your earnings if you earn above your personal allowances and tax relief. The rate of income tax you pay depends on how much money you earn.

Check what the income tax rates are on GOV.UK.

Check if you’ve already paid tax on your income

When you're calculating how much income tax you need to pay, you’ll need to work out if you’ve received any income where the tax has already been paid. Your employer should have already deducted tax from the wages or workplace pension payments you get.

When the government calculates your total taxable income, they deduct your personal allowances and tax relief from your ‘gross income’. This is the amount you received before tax. So when you're working out the total tax you need to pay for the year, make sure you take into account if you've already paid tax on your income. 

You might also pay income tax on the interest you earn on your savings before it’s paid to you. This depends on your personal savings allowance. Check what your personal savings allowance is on GOV.UK. 

National Insurance contributions

As well as checking you’re paying the right amount of income tax, you might want to check you’re paying the correct amount of National Insurance contributions. National Insurance contributions are calculated on gross pay - this is your total pay before tax. If you’re employed, the amount of National Insurance you pay depends on the amount you earn and your pension arrangements.

If you’re self-employed, you pay National Insurance contributions at different rates depending on your profits.

Check what your National Insurance contributions should be on GOV.UK. 

Keeping a record of your income

If you have to do a Self Assessment tax return, you must legally keep a record of your income and any expenses you claim against tax. You’ll need these records if HMRC asks you to complete a tax return. 

Read more about what records to keep and how long you should keep them for on GOV.UK.

How you pay income tax

If you’re employed or you get a pension, your tax is deducted from your earnings before you receive it through the Pay As You Earn (PAYE) scheme. This is called ‘deduction at source’. 

If you’re self-employed, your income tax is not deducted at source and you have to do a Self Assessment.

How does tax work in UK

How Income Tax, National Insurance and the Personal Allowance works

Unsure about Income Tax and National Insurance? Don’t know what the National Insurance threshold is? Unsure how the Personal Allowance applies to you? We explain how the tax system works and what to do if you think you’re overpaying.

  • Should I pay any Income Tax?
  • The Personal Allowance if you earn over £100,000
  • What is Income Tax used for?
  • How much Income Tax will I pay?
  • National Insurance
  • What do you pay National Insurance on?
  • Voluntary ‘Class 3’ National Insurance rates
  • Voluntary ‘Class 2’ National Insurance rates

Should I pay any Income Tax?

Income Tax is charged on most types of income, such as wages and salary from jobs, your profits if you run a business, pensions, rents you receive if you’re a landlord, and interest and dividends from savings and investments.?

Got a question?

Our advisers will point you in the right direction.

Start a webchat online or call us on 07868 663538.

You don’t usually pay Income Tax on all of your taxable income. This is because most people qualify for one or more allowances. An allowance is an amount of otherwise taxable income that you can have tax-free each tax year.


Reduced by £1 for every £2 above income threshold until it reaches £0.

20% of this allowance is given as a reduction in your tax bill (unlike the Personal Allowance and Age Allowance which are deducted from your taxable income before tax is worked out).

£1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; £0 for additional-rate taxpayers.

Most allowances are increased each year and increases apply from the start of the tax year, 6 April.

Jump down to ‘How much Income Tax will I pay?’ to find out what you’re liable for.

What is a Personal Allowance?

Everyone, including students, has something called a Personal Allowance – the amount of money you’re allowed to earn each tax year before you pay Income Tax. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or smaller depending on your income or if you owe tax from a previous tax year.

The tax year runs from 6 April to 5 April, and for the 2019-20 tax year the standard Personal Allowance is £12,500. The Personal Allowance will also be set at £12,500 for 2020/21 tax year and then indexed with the Consumer Price Index (CPI) from then onwards.

If you earn less than this, you normally shouldn’t have to pay any Income Tax.

The amount of the Personal Allowance you receive is set by the government and can change from one tax year to the next.Check the most up-to-date Personal Allowance figures on GOV.UK.

The Personal Allowance if you earn over £100,000

For people earning over £100,000, the figure of £12,500 will be reduced by £1 for every £2 earnt. When someone earns £125,000 Income Tax is paid on everything earnt and there’s no tax-free allowance.

What is Income Tax used for?

Your Personal Allowance is taken off your earnings before you start paying Income Tax.

Income Tax is collected by HMRC on behalf of the government. It’s used to help provide funding for public services such as the NHS, education and the welfare system, as well as investment in public projects, such as roads, rail and housing.

How much Income Tax will I pay?

From April 2019, the standard Personal Allowance will increase to £12,500, with the higher rate tax threshold increasing to £50,000.

Income Tax is made up of different bands. This means that as your income increases so too does the amount of Income Tax you pay.

It’s an attempt to make paying Income Tax as fair as possible so that those who earn the most contribute more.

The table below shows the rates of Income Tax depending on how much you earn.

If you live in Wales, income tax rates are now set by the Welsh Government. These are currently the same as for England and Northern Ireland in the 2019/20 tax year. If you live in Scotland, the rates are different.

Calculate your income tax and national insurance contributions.

If you think you might have had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.Get the R38 form to reclaim tax on GOV.UK, or contact HMRC.

National Insurance

National Insurance contributions are a tax on earnings paid by employees and employers and help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

Unlike Income Tax, National Insurance is not an annual tax. It applies to your pay each pay period (which might be monthly, weekly or some other period depending on your employer’s arrangements). This means if you earn extra in one month, you’ll pay extra National Insurance, but you won’t be able to claim the extra back even if your pay is lower during the other months of the tax year.

You begin paying National Insurance once you earn more than £166 a week (this is the figure for the 2019-20 tax year).

The National Insurance rate you pay depends on how much you earn:

  • 12% of your weekly earnings between £166 and £962
  • 2% of your weekly earnings above £962.

Your National Insurance contributions will be taken off along with Income Tax before your employer pays your wages.

Until April 1977, some older married women and widows who pay National Insurance contributions at the Married Women’s Reduced Rate could choose to pay a reduced rate of national insurance. You might still be paying the reduced rate if you opted for this before the scheme ended. The reduced rate is 5.85% of weekly earnings between £166 and £962 instead of the standard rate of National Insurance of 12% on earnings. As a result, your State Pension could be reduced and your ability to claim some contribution-based benefits could be negatively impacted.

Employee’s National Insurance contributions stop once you reach State Pension age.Find out more about your National Insurance contributions on GOV.UKopens in new window.

What do you pay National Insurance on?

Both you and your employer must pay National Insurance contributions on your earnings – including holiday pay, sick pay and maternity pay – and, in most cases, any reward you get that can be easily converted to cash. But there are exceptions – for example, if part of your pay is shares in your employer’s company using a tax-approved share scheme.

Part of your pay may be in the form of benefits in kind. As an employee, there is no National Insurance on benefits in kind. However, with some exceptions, employers do have to pay National Insurance on the value of any benefits in kind that they provide you with.

What do National Insurance payments pay for?

Your National Insurance payments go towards state benefits and services, including:

  • the NHS
  • the State Pension
  • unemployment benefits
  • sickness and disability allowances.

Voluntary ‘Class 3’ National Insurance rates

Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record to get a higher State Pension.

To receive the full new State Pension, which is payable to people who have reached their State Pension age on or after 6 April 2016, you’ll need to have 35 qualifying years of National Insurance contributions.

Anyone with less than this will receive a reduced State Pension. To receive the new State Pension you need to have a minimum of 10 qualifying years.

If you don’t have 35 qualifying years, you may want to consider paying Class 3 voluntary contributions to boost your pension entitlement.

In 2019-20, Class 3 contributions are payable at a weekly rate of £15. This is the maximum you can pay each week.

You may not always be able to pay Class 3 contributions (or Class 2) for a tax-year. That’s why it’s important to find out whether you can make payments towards any gaps, how much you will need to pay, and what benefit (if any) you would get by making a voluntary payment before deciding whether to pay any voluntary National Insurance Contributions (NICs).For further information on paying voluntary Class 3 National Insurance contributions and to check your national insurance record visit the GOV.uk website.

Voluntary ‘Class 2’ National Insurance rates

If you’re self-employed or have been working abroad, you may be able to pay voluntary Class 2 contributions instead.

Class 2 NICs are currently flat-rate weekly contributions of £3.00 per week in 2019-20. You’ll need to pay them for every week or partial week of self-employment in a tax year if your profits for the entire tax year are £8,632 (the Small Profits Threshold) or more in 2019-20.

Payment of Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 NICs even if your profits are lower can still help you build contributory entitlements to benefits.

This can be a specialist area and it’s best to take advice based on your individual personal circumstances.

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