This is a topic which I get asked about a lot. And with more time spent at home in the pandemic it's even more likely that there can be some real tax savings to be made.
I've seen a real boom in new businesses springing up - taking advantage of unique opportunities created by the lockdown. A kitchen can now also be a bakery, a garden shed can also be a pottery studio and a spare room can now host networking events and conferences (thanks zoom!).
So, how to take advantage of these tax savings on offer? A quick win is claiming the government flat-rate for utilities. To take advantage of this you have to work from home more than 25 hours a month.
The working from home flat rates for the 2020/21 tax year are:
£10 per month if you work between 25 and 50 hours per month;
£18 per month if you work between 51 and 100 hours per month;
£26 per month if you work 101 or more hours per month.
So if you work e.g. 125 hours a month at home - you can put 12x £26 as a deduction on your income tax self assessment (£312). That's a tax saving of £62.40 if you are a basic rate tax payer.
The benefit of the flat-rate is it's simplicity - you don't need to keep paperwork or calculations to support the expense deducted. However, you may find that (if you live somewhere which isn't particularly energy efficient) you are better off taking your actual household utility costs and calculating how much of these costs apply to your business.
You can do this by taking your energy bill for your total living space and dividing it up - to work out how much is used for business. You can do this by taking the size of the room and the hours a day spent in that room. It doesn't need to be done to the last cm or minute - as long as you have a clear and reasonable calculation which is consistent year on year - this should be fine. Under this method you will need to keep copies of the full household bills as well as the calculations used to arrive at your deduction.
Make sure you are taking advantage of available tax deductions for utilities used when operating your business at home.
I would suggest doing a quick calculation for one month in summer and one month in winter and comparing your actual utility bills (split to reflect business use) vs the flat rate you can claim.
This way, you can see if the extra paperwork and record retention is worth it - otherwise the flat-rate can be a good way to save money and not take up too much admin time!