News

Tuesday 1st May 2018

How paying rent for your home office can save you tax

If you’re a director of a limited company and you work at home, the company can pay you rent for your home office. 

The benefit of doing this is that you can extract funds from the company with little or no tax charge:

  • The company will get a corporation tax deduction of 19% on the rent it pays to you
  • Assuming you're a basic rate tax payer, you pay 20% income tax on rental profits

So this incurs a small tax charge of 1% (the difference between 20% and 19%).

You can then reduce the 20% income tax by offsetting some of the costs of your home such as mortgage interest, insurance, energy, etc.

Example

Davina Dentist Ltd will make £30,000 profit this year. The company decides to pay Davina £2,500 home office rent for the year.

The company’s profit is reduced to £27,500 and saves £475 of corporation tax.

Davina claims £400 for mortgage interest, insurance, heat, light, etc, and so pays £420 income tax (£2,500 - £400 = £2,100 x 20%)

Davina and her company have made a small tax saving, and now Davina has £2,500 in her personal bank account that would have otherwise been tied up in the company.

When we compare this to other ways of extracting funds from the company for a basic rate tax payer, the tax is much higher

For example, dividends:

  • No corporation tax deduction
  • Income tax on your dividends of 7.5%

And how about salary?

  • The company will get a corporation tax deduction of 19%
  • You pay 20% income tax plus 12% national insurance
  • So effectively you pay an extra 13% tax/national insurance

Pay a commercial rent

The amount of rent paid needs to be reasonable, and not above a commercial rent. An amount between £100 and £250 per month would generally be reasonable.

Jointly owned home

If you own the property jointly (for example, with your spouse), then you need to split the rental income between you. If the company pays £2,000 home office rental, then that’s £1,000 income each for you and your spouse.

Rental agreement for mixed use of your house

The space in your house that is shared between you and your business has mixed use – private and business. This is important, because if part of your house was used for business only, you could be liable to pay business rates, or Capital Gains tax when you sell your house.

Ensure that the mixed use is documented by creating and signing a home office licence agreement.

What do I need to report to HMRC?

If your property income is under £2,500 per year:

  • Contact HMRC by phone or letter to let them know

If your property income is over £2,500 per year:

  • Complete a self assessment tax return.