Want to talk about your accounts? Call now

Garden Office At Home

by | May 12, 2021 | Business, COVID-19, HMRC, Self-Employed, Taxes, VAT | 0 comments

If you run your business as a personal or family company, you will need to decide how best to extract profits for your personal use. A typical tax-efficient strategy is to pay yourself a small salary and then extract any further profits as dividends. Where this approach is adopted, you will need to determine your optimal salary level of 2021/22. Benefits of paying a salary Unless you already have the 35 qualifying years needed for the full single-tier state pension when you reach state pension age, paying yourself a salary that is at least equal to the lower earnings limit for Class 1 National Insurance purposes (set at £6,240 for 2021/22) will ensure that the year is a qualifying year for state pension and contributory benefit purposes. A further benefit of this approach is that employee contributions between the lower earnings limit and the primary threshold (set at £9,568 for 2021/22) are payable at a zero rate (although employer contributions are payable on earnings in excess of the secondary threshold (set at £8,840 for 2021/22)). Determining the optimal salary level The optimal salary level (from a tax and National Insurance perspective) for 2021/22 will depend on whether your personal allowance remains available, and also on whether your company is able to claim the National Insurance Employment Allowance. The Employment Allowance is set against your employer’s Class 1 National Insurance liability. The Employment Allowance is not available to companies where the sole employee is also a director. This means that if you operate as a personal company where you are the only employee and director, you will be unable to claim the allowance. However, if you operate as a family company and have more than one employee (or the only employee is not also a director), you should be able to claim the allowance. The allowance is set at £4,000 for 2021/22. It is not available where the Class 1 National Insurance bill for 2020/21 was £100,000 or more. Optimal salary where the Employment Allowance is unavailable If you are operating a personal company or if the Employment Allowance is otherwise unavailable, assuming that you have not used your personal allowance elsewhere, your optimal salary for 2021/22 is one equal to the primary threshold of £9,568. Remember, that as a director, you have an annual earnings period for National Insurance purposes. However, if you opt to pay yourself a monthly salary, the equivalent is £797 per month. As the secondary threshold for 2021/22 is lower than the primary threshold, employer’s National Insurance contributions will be payable to the extent that your salary exceeds £8,840. If you pay yourself a salary of £9,568 for 2021/22, your company will need to pay employer’s National Insurance contributions on that salary of £100.46 (13.8% (£9,568 - £8,840)). Although it is possible to pay a salary equal to the secondary threshold of £8,840 free of tax and National Insurance, it is worthwhile paying a higher salary of £9,568. The salary and the associated employer’s National Insurance contributions are deductible in calculating your company’s taxable profits for corporation tax purposes. As the rate of corporation tax at 19% is higher than the rate of employer’s National Insurance at 13.8%, the corporation tax relief obtained on the higher salary outweighs the cost of the employer’s National Insurance. However, once your salary exceeds the primary threshold of £9,568, you will need to pay primary contributions on the excess at the rate of 12%. As the combined National Insurance hit at 25.8% outweighs the rate of corporation tax relief (at 19%), this is not worthwhile. Optimal salary where the Employment Allowance is available The Employment Allowance reduces your employer’s Class 1 National Insurance bill by up to £4,000. Where this is available, your optimal salary for 2021/22 is one equal to your personal allowance. This will normally be £12,570. As the Employment Allowance will offset any employer’s Class 1 National Insurance contributions that would otherwise be payable to the extent that your salary exceeds £8,840, you will not need to pay any tax or National Insurance until your salary level reaches the primary threshold of £9,568. Once this level is reached, it is worth paying additional salary of £3,002 for the year to take your salary up to the level of the personal allowance of £12,570. Although you will pay employee’s National Insurance contributions of £360.24 (£3,002 @ 12%) on the additional salary, as the salary is deductible for corporation tax purposes, you will reduce the corporation tax payable by your company by £570.38 (£3,002 @ 19%), delivering a net saving of £210.14. However, once your salary exceeds the personal allowance of £12,570, tax will also be payable at the basic rate of 20%, meaning the pendulum swings the other way and the combined tax and employee’s National Insurance payable on any further salary will outweigh the associated corporation tax deduction. Get in touch Your optimal salary will depend on your individual circumstances. We can help you decide on your 2021/22 salary level.

As more people are now working from home, the desire for a designated workspace has become a priority for many. The past year has forced many workers to fill up the dining table and any other flat surface available with monitors, computers, laptops, cables, Wi-Fi boosters, microphones and ring lights out of necessity but we know this isn’t a sustainable way of working, particularly when you have family sharing your space too.

With so little internal space available in the family home, which feels even smaller in the winter months, many people are now seeking to build a permanent home office. With extensions and loft conversion costs going through the roof, and the lack of building materials many people are turning to building garden offices.

What tax reliefs can be claimed?

A garden office/outbuilding is normally considered a structure and therefore it is not possible to claim tax relief for the costs of the building/shed, even if it is moveable. This includes all costs of any planning, foundation work and installation.

However, it is usually possible to claim tax relief by way of capital allowances on some fixtures and fittings, such as those specifically required to enable you to do your work. For example this could be internet cabling, thermal insulation, CCTV and specialised lighting, but would not cover usual integral fittings like doors and floors and ordinary wiring.

You can also claim capital allowances on furniture and equipment needed for the office for work purposes, such as office equipment, shelving, desks and seating. Usually you would claim capital allowances for the full cost in the year of purchase, by way of Annual Investment Allowances (AIA) subject to a cap. In addition to capital allowances, tax relief can be claimed on the revenue costs incurred for the running of the garden office, such as electricity for lighting and heating, and for the general repairs and upkeep.

Is VAT able to be reclaimed

VAT incurred on the cost of the structure itself or any furnishings or furniture can be reclaimed if it is solely used for business, and VAT can also be reclaimed on the ongoing running costs. You must ensure there is a VAT invoice addressed to the business to support any claim, as per the usual VAT rules.

Personal tax issues

If a garden office is used exclusively for business, and if you are a company, you will not pay any benefit in kind tax on it. Benefits in kind are chargeable to tax when a company pays for personal expenses for an employee or director. If the garden building was incurred by a company and it was also used personally for other means or by other members of the family, this would then trigger a benefit in kind charge and the tax due could well outweigh any tax savings, dependent on circumstances.

However, you wouldn’t purchase through a company if there is expected to be personal use on the outbuilding.  The reason for this is due to the issue of Personal Benefit in Kind (P11d).  HMRC will need there to be an annual assessment of the personal benefit in kind for the Directors – reported on a P11D and Class 1A National Insurance payable by the company, as well as personal income tax by the Directors. The calculation of the benefit can be complicated but should in principle follow the HMRC guidance for ‘Assets made available without transfer’ – guidance available at www.gov.uk

Also, if you were to include the building cost as a business cost, you may have to pay capital gains tax on it when you sell the house if there is a value in it.  The amount you’d pay would depend on the percentage of the land the garden office takes up.  If your garden office is made up of bricks and mortar with state-of-the-art kit out with all the mod-cons, it’ll devalue at a much slower pace than a modernised wooden shed, thus affecting Capital Gains Tax implications more.

Can I rent the new office space to my business?

You could set up a rental agreement so that your business pays you rent for the office space but beware you would be taxed in the rental income you receive. This could still be beneficial for some, however careful consideration needs to be made on a case by case basis to ensure that you are not left with a capital gains tax charge on selling.

Everyone has a different situation so it is important to consider your situation and call for advice about your personal circumstances to ensure the right tax treatment to suit you and your business. The treatment will be different for those who are self employed compared to those who are limited companies. There is still some tax savings to be made but careful planning is require.

Get in touch

Contact us to discuss the above so we can assist you to make the right decision for you: Pi Accountancy | Expert Business Advice | Gloucester & Swindon (pi-accountancy.co.uk)

Read more