If you work from home, you can claim allowable expenses to reduce your tax liability. HMRC offers two ways to calculate these expenses: the Simplified Method and the Proportionment Method. Choosing the right approach can help you maximise your tax savings. In this guide, we compare both methods so you can decide which works best for you.
1. What Are Allowable Expenses?
Allowable expenses are those which are incurred wholly and exclusively for your business or trade.
Sometimes these costs are incurred for business purposes while working from home. They include utility bills, internet, phone usage, and even rent or mortgage interest. The key is choosing the right calculation method for your situation.
2. The Simplified Method
The Simplified Method allows you to claim a flat rate for your home office expenses, based on the number of hours you work from home each month. This method is straightforward, as it eliminates the need to calculate individual bills and portions for business use.
Flat Rate Allowance (2024/25 Tax Year):
25 to 50 hours per month: £10 per month
51 to 100 hours per month: £18 per month
101 hours or more per month: £26 per month
Advantages of the Simplified Method:
Ease of Use: There’s no need to keep track of your utility bills or calculate exact proportions of usage.
Less Paperwork: No need to save receipts for household bills, as the flat rate is set by HMRC.
Disadvantages of the Simplified Method:
Less Flexible: The flat rate may not cover all your home-working expenses, especially if your actual costs are higher.
Generalized Estimate: It doesn't take into account specific home-related costs that may vary based on your home size, energy usage, or work hours.
3. The Proportionment Method (Actual Costs)
The Proportionment Method allows you to claim actual costs incurred while working from home. This method involves calculating the exact proportion of your home-related expenses used for business purposes.
How to Calculate Proportions:
You’ll need to calculate the percentage of your home used for work. This is usually based on:
Number of rooms used for work: If you use one room in a five-room house, you would claim 1/5 of your home expenses.
Time spent working: Adjust the claim if the room is only used for business part-time.
Expenses You Can Claim:
Utility Bills: Heating, electricity, and water (a percentage based on business use).
Rent or Mortgage Interest: A proportion based on the size of your workspace and time used for work.
Phone and Internet: Only the business-related portion of your bills can be claimed.
Office Supplies and Equipment: Full claim if used exclusively for business.
Advantages of the Proportionment Method:
Accurate: You can claim based on your actual expenses, which could result in higher tax relief if your costs are significant.
Comprehensive: Allows you to claim a wider range of expenses, including rent or mortgage interest, which may not be covered by the simplified method.
Disadvantages of the Proportionment Method:
More Complex: Requires careful calculation of proportions and detailed records of your home expenses.
Time-Consuming: You must keep all receipts, invoices, and evidence to support your claims, which can involve more paperwork.
4. Which Method Should You Choose?
The best method for you depends on your specific situation, the size of your home office, and how much time you spend working from home.
Choose the Simplified Method if:
You work from home occasionally or for fewer hours.
You don’t want the hassle of keeping detailed records of household expenses.
Your home-related business expenses are relatively low.
Choose the Proportionment Method if:
You work from home full-time or use a significant portion of your home for business.
Your actual home-working costs (like heating, electricity, and internet) are higher than the flat-rate allowance.
You’re comfortable keeping detailed records and calculating exact proportions for tax purposes.
5. Record Keeping and Compliance
Regardless of which method you choose, it’s important to maintain accurate records. For the simplified method, you only need to track the number of hours you work from home each month. For the proportionment method, however, you’ll need to save receipts, invoices, and calculations for all home expenses claimed.
HMRC may ask for proof to back up your claims, so having clear documentation is essential to avoid penalties.
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