Maximising the tax efficiency of your home office
If you use part of your home for work, HMRC accepts that your company can compensate you tax and NI free. Using its approved allowance might seem the obvious way to do it, but there is an alternate way which could be more tax efficient.
Working from home
HMRC accept that it has become necessary for many people to work at home. Therefore it allows employers to pay a tax and NI free sum of up to £4 per week to cover additional home costs. This may cover your extra energy bills etc., but £208 per year won’t compensate for losing the use of a room in your home. It also won’t be covering extra costs, such as council tax, relating to it.
One suggestion is to rent your home workspace to your business. You would charge a rent that corresponds to the business use of your energy bills, standing chargers, mortgage interest, etc. The advantage of this is you will have covered more of your costs than with the £4 per week allowance.
However matching the rent to your expenses may prove difficult. As domestic costs will vary. Therefore a fixed rent would be better.
If you was to charge a fixed rent to your company then this can also have drawbacks. If the rent exceeds the deductible proportion of costs relating to your home workplace, it will be taxable. Also, if the rent falls short of your costs you won’t be achieving maximum tax and NI efficiency.
You should try and set the rent according to what you would expect to pay for similar commercial accommodation. This can maximise the tax and NI savings.
Tax and NI savings
For example if you charged your company £5,000 per year for rent, and assuming the annual costs relating to the room being rented was £1,000, then tax would be charged on the £4,000 difference. But it won’t be liable to NI. Meaning that compared to taking salary of £5,000 you and your business will save up to £1,465 per year between you. Even compared to taking a dividend there would be an annual tax advantage of £845.
If you own your home jointly with a spouse or partner whose income is less than their annual personal tax-free allowance (£10,600 for 2014/15) then there could be extra tax savings. Any rent received from the business should be shared between you equally. Assuming rent of £5,000 per year and deductible expenses of £1,000, half the difference would be income for your spouse/partner. If they have no other income, whatever they receive will be tax free. That could boost the annual tax and NI savings to £2,085.