Home office with laptop and house plants

What tax do I pay when working from home?

September 10, 2021

According to the Office for National Statistics, 46.6% of people in employment have worked from home at some point during the past year, with 86% of those doing so as a result of the COVID-19 pandemic.

What’s more, 60,000 people were contacted by the NHS between 8th and 14th July and advised to self-isolate, meaning thousands more may be having to work from home in the near future.

Many employees are now wondering where this leaves them with regards to additional costs they may have incurred as a result of their new working arrangements.

There have been rules around homeworking for some time, yet because of the pandemic, a lot of these rules have been relaxed. In this article, we’ll go through them all in detail.

What tax do I pay when working from home?

For the tax year 2021/22, every employed person has to pay Income Tax on earnings over £12,570, however, if you work from home you can also claim tax relief for certain things.

Some of these include gas, electricity and water bills, as well as business phone calls and any office equipment you’ve had to buy in order to do your job from your home instead of your workplace.

Income tax explained

As mentioned above, everyone earning more than £12,570 has to pay income tax, however how much you pay depends on what you earn. Most people can earn up to £12,570 without paying tax on it – this is called your personal allowance. For more information on this, read our article on how much you can earn before paying tax.

For an idea of how much tax you might have to pay as a founder, you can visit the government website here, otherwise the tables below outline the current tax brackets for the UK.

Tax brackets for England, Wales and Northern Ireland

Band Earnings Tax Rate
Personal allowance Under £12,570 0%
Basic rate Under £100,000  20% on earnings between £12,571 and £50,270
Higher rate £50,271 to £150,000 40% on earnings between £50,271 and £150,000
Additional rate £150,001 and above 45% on earnings over £150,001

Tax brackets – Scotland

Band Earnings Tax rate
Personal allowance Under £12,570 0%
Starter rate £12,571 to £14,667 19% on earnings between £12,571 and £14,667
Basic rate £14,668 to £25,296 20% on earnings between £14,668 and £25,296
Intermediate rate £25,297 to £43,662 21% on earnings between £25,297 and £43,662
Higher rate £43,663 to £150,000 41% on earnings between £43,663 and £150,000
Top rate  £150,000 and above 46% on earnings over £150,000

The amount of tax relief you can claim is based on which tax band you’re in and how much you’ve spent on work related items and utility bills outside of your normal usage. If, for example, you’re a basic rate taxpayer, you can claim back 20% of the cost of an item you’ve bought for work purposes.

Claim tax relief for working from home

Tax relief is where you either pay less tax to account for money you’ve spent on things – such as business expenses – or the tax is repaid to you after you’ve spent the money. Some types of tax relief are automatic, but some you need to apply for.

In the tax year 2020/21, more than three million people claimed the working from home tax relief (mainly due to the pandemic), with HMRC receiving more than half a million claims for the current tax year.

The tax office considers homeworking to be where an employee works from home regularly – whether that’s full-time or two days a week, even if they vary the days they work at home each week. It's important to note, however, that they must have been asked to work from home by an employer in order to claim this tax relief.

Informal working from home that hasn’t been previously arranged (for example taking work home in the evenings) doesn’t count as homeworking, so it’s good practice to have this stated in an employee’s contract of employment. During the pandemic, however, HMRC accepted that employees who are working from home because their workplace is closed, or they’ve been advised to self-isolate meet these requirements.

Who is eligible for working from home tax relief?

Only those who already pay tax can claim tax relief. If a worker has specifically been told to work from home on a regular basis, or they’ve been advised to self-isolate due to the coronavirus pandemic, they should be entitled to make a claim.

You may be able to claim working from home tax relief if:
  • You regularly perform your main duties at home, instead of your workplace
  • Your costs have increased since you started working from home – for example, your utility bills have gone up
  • You need to purchase new equipment or facilities in order to do your job from home
You might not be eligible for working from home tax relief if:
  • You’re claiming for expenses that aren’t related to working from home – these must be claimed differently
  • You pay tax by Self Assessment – you should claim working from home tax via your next tax return
  • You’re normally allowed to choose whether you work at the business premises or elsewhere

To check whether you’re entitled to tax relief for working from home, you can visit the government’s website here.

What can I claim tax relief for?

You can only claim money back on items you’ve bought for business use and what you’ve spent on bills in addition to your normal domestic usage.

Some examples of some of the things you can claim working from home tax relief are:

  • Extra money spent on additional household costs, for example on energy bills, water rates  and broadband utility bills
  • Business calls you’ve had to make on your private mobile phone
  • Office equipment such as desks, chairs and computer accessories and items like laptops and phones that are intended for work purposes (see more on this in the section on office equipment, below)

If you provide your employees with mobile phones in your business’ name, you can claim tax exemptions, regardless of the amount of private use. If the contract is in your employee’s name, you can reimburse them for the costs, or they can claim a tax deduction from HMRC.

Employees can’t claim tax on:

  • Items their employer has paid for in order for them to perform their duties from home 
  • Expenses that have already been paid by their employer

How to claim tax relief for working from home

Provided you’re eligible for working from home tax relief, you’ll be entitled to a flat rate of £6 to go towards your additional expenses – that’s even if you only work from home for part of the week. There are two ways in which you can claim this:

  1. Employers can pay their employees £6 per week extra, tax-free
  2. Employees can apply for the £6 to be deducted from their taxable income through HMRC

As previously mentioned, the income bracket you’re in determines how much you’ll get. This is how much you’ll receive of the £6 based on how much tax you pay:

  • £1.20 per week or £62.40 per year for a basic rate (20%) taxpayer
  • £2.40 per week or £124.80 per year for a higher rate (40%) taxpayer
  • £2.70 per week or £140.40 per year for an additional rate (45%) taxpayer

This doesn’t need to be justified to HMRC, so you won’t need to keep receipts as proof of what you’ve spent. If, however, you believe the flat rate doesn’t cover the cost of your working from home expenses and you want to make a claim, you’ll usually need to provide evidence.

To make a claim, you’ll need to break down how much you spend on utility bills and products for work. Bear in mind that you’ll only be able to claim for the costs of heating and lighting in your home office and you have to claim within four years of the expense. This does mean you can make backdated claims for up to four years, though, and you’ll receive a lump sum payment if the claims are successful.

Ways you can claim

You can claim working from home tax relief by post or over the phone, although it might be quicker and easier to do it on the government’s website. Simply fill out a short questionnaire about your work situation and expenses to find out how much you’re eligible to claim. You’ll need to provide evidence of expenses like utility bills, but not things like uniform cleaning.

If your claim is successful, you’ll receive a rebate for the full tax year (even if you don’t know when you’ll be going back to your workplace) and your PAYE tax code will be changed to reflect your new circumstances.

Self-employed business owners and sole traders will need to claim working from home tax relief through their Self Assessment tax return. It’ll be deducted from your profits, which will reduce your overall tax bill.

New tax relief rules regarding COVID-19

Employees have always been able to claim tax relief for increased costs if their employer has asked them to work from home, however, the rules have been relaxed due to the COVID-19 pandemic and HMRC have been more lenient regarding claims. During the 2020 lockdown, it announced that even if you only needed to work from home for one day, you would get a whole year’s tax relief. This applies to the 2021/22 tax year too and includes those claiming through self-assessment.

On 6th April 2020, the working from home tax relief flat rate was increased from £4 per week to £6 per week.

Paying tax on office equipment

If an employee buys office equipment in order for them to do their jobs from home, they can claim tax relief using either the flat rate method or by calculating the costs of the items. However, if their employer helps pay for the item, they’ll need to reduce the amount they’re claiming tax relief for.

Some of the items you can get working from home tax relief for include:

  • Laptops and computers
  • Computer accessories
  • Stationary
  • Desks
  • Office chairs
  • Uniforms (including cleaning, provided it’s essential to your job role)
  • Tools
  • Repairs, maintenance and replacement of equipment

Where an employer buys office equipment for their employee to use for work but they then go on to use it privately for significant periods of time, HMRC will see the item as a benefit in kind (BIK) and it will be taxed accordingly. For more on BIK, read our article on company car tax here.

Employees can also claim tax relief through capital allowances if their employer is unable or unwilling to reimburse them, however, it’s difficult to claim for office furniture as it’s considered a luxury item rather than one that’s essential for them to do their job.

Summary

Most employed people have to pay income tax, however, there are tax rules you should know about if you have to work from home.

You can claim tax relief for things like extra money spent on utility bills and office equipment you’ve had to buy in order to carry out your role at home instead of your normal workplace.

You can claim working from home tax relief via a flat rate that’s been set by the government or working out your additional costs and providing evidence of this to the tax office.

The rules have been relaxed since the pandemic and HMRC are backdating claims, so it’s well worth looking into whether you could be eligible for working from home tax relief.

Cam Finney

Cam is a Chartered Accountant with a wealth of experience working in accountancy. After graduating with a Bachelors Degree in Accounting and Finance, he moved to London to start an Audit graduate scheme, where he developed a robust knowledge-base of all things accounting.