Understanding tax implications of working from home
Many micro-businesses start in a spare bedroom, but what are the tax rules and benefits that apply to this situation?
Deducting allowable expenses
When you’re working from home, some of your bills and other expenses may be used to reduce your annual tax bill. But you must always remember – you may only claim for expenses that resulted directly from running your business.
Your business is taxed on its net profit. Your turnover minus your allowable expenses gives your taxable profit.
Some items considered to be legitimate costs of doing business include:
- Salaries
- Marketing
- Stock
- Business insurance
- Business phone calls
- Business-purpose-only purchases (e.g. office computer)
Simplified expenses
In the UK, if working from home, you can take advantage of the simplified expenses allowance, which lets you to claim a flat rate for general expenses. Consult this table to determine your deduction.
If you don’t claim simplified expenses, you will have to calculate the proportion of gas, electricity, etc. used for business purposes. This calculation must take into account both the area of your business space and the hours you worked each day, week or month over the course of the year.
Pay tax twice
Don’t forget that if you are drawing a salary from your business, you will need to pay income tax as well. Because of the overlap between working from home and being self-employed, it is a good idea to seek tax advice from a qualified accountant. That way you can be sure you have met your legal obligations without paying more than you should.
