Expenses you can deduct for a home business

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woman at work

woman at workWorking from home can be a practical and low-cost way to develop a business, especially for parents looking to work part-time. And if your home is your office, some of the costs of running your home can be counted as expenses so you can reduce your tax bill.

Here’s a simple break-down of which costs can be considered business-related, and how to calculate your savings.

Tax on profit after expenses

If you are self-employed you will need to calculate the profits of your business venture each year.  Your profit is the sum of all the income received, minus all the business expenses paid out.  Income tax and self-employment National Insurance is charged on any profits generated after applying allowances.

In calculating profits, the tax authorities recognise that there are costs incurred when working from home.  These can be included as expenses proportionately to the size of property, the space used and the amount of work undertaken.

But which expenses can be included and how should they be divided up?

The first step is to identify the costs that you have incurred for the period in question.  If you’re self-employed then this will likely be April to April – which reflects the financial year.

Business expenses you can deduct

The expenses to consider are:

  • Mortgage interest or rent – the important word here is interest.  You must not include the cost of repaying capital on a mortgage.  If your mortgage is interest-only, the interest portion is easy to identify as it equals the monthly payment.  However, if your mortgage is repayment then the interest needs to be identified separately.  This is usually possible from the annual statement you receive from your mortgage lender.
  • Insurance – a proportion of buildings insurance can be claimed.  This would not cover contents but the buildings proportion alone.
  • Utilitiesgas, electricity and water.  All these expenses will increase as you spend more time at home.  The house or flat will need to be heated and your computer or equipment will use electricity.
  • Council Tax – the annual payments you are required to make as part of owning or living in a property are also relevant.
  • Cleaning costs – if you run a business where you see customers in your property then you can include cleaning costs.
  • Other items such as heating system service contracts can also be added.

How to divide expenses

The second step is to divide the costs between personal and business use.  Count the number of rooms in your house.  Which rooms do you use for business and how much do you work?

Let’s say you work in one room of the four in your house, and you work from home an average of two days a week.  Then the household expenses considered to be business-related should be multiplied by 1/4 then by 2/7.

For example, if your total costs add up to £5,000, then the valid business expenses would be (£5,000 x1/4 x 2/7) £357.

This means that £357 should be added into your list of expenses for the year and will reduce the taxable profits and profits on which National Insurance is payable.

The more you work, the larger the proportion of expenses can be offset.

Pam Warwick is a qualified chartered accountant and juggles her own accountancy practice –Warwick McArdle – with a part-time job, her home life and two children! She’s here to help MyFamilyClub readers understand tax and the ins and outs of working for yourself.