The Rise of Home-Based Businesses
The modern workforce has changed dramatically over the past decade. A growing number of individuals are choosing self-employment and opting to run businesses from the comfort of their own homes. Technology, flexible working tools, and shifting lifestyles have all contributed to this change. Home-based businesses are now one of the UK’s most common forms of self-employment.
This shift has also created new questions about tax and accounting. One of the most important among them is which expenses can be claimed when part of the home is used for business purposes. Knowing what qualifies can reduce taxable income and increase your available working capital.
Why Claiming Allowable Expenses Matters
Every sole trader in the UK is required to report their business income and expenses to HMRC via the Self Assessment tax return. Allowable expenses are the costs you can deduct from your income when calculating your taxable profits. The more accurately you calculate and claim your business expenses, the less Income Tax you may need to pay.
These expenses should reflect the genuine costs of running your business. Whether you pay for materials, utilities, or professional services, anything that is used solely for the purpose of the business can be considered for deduction. The benefit is twofold: it ensures a fair tax contribution and provides you with a more accurate picture of your business’s financial health.
The Wholly and Exclusively Rule
One of HMRC’s key tests for whether an expense qualifies is whether it was incurred wholly and exclusively for business purposes. This means that the expense must have been necessary for your business operations and not have any personal element to it.
This rule presents challenges when you work from home because many costs overlap. For instance, your internet connection, heating, or electricity supply is likely shared between personal and business use. In such cases, you need to work out what proportion of the cost relates to business use and only claim that part.
If an expense is partly personal and partly for your business, you must make a fair and reasonable division. HMRC expects you to be able to explain and support your calculation if asked.
The Trading Allowance and Low-Income Threshold
If your annual income from self-employment is £1,000 or less, you are eligible for the trading allowance. This means you don’t need to register for Self Assessment or report your earnings to HMRC unless you want to voluntarily record a loss or claim certain tax reliefs.
However, once your income exceeds this threshold, the trading allowance no longer applies and you must register with HMRC. From that point, you will be able to claim allowable expenses to reduce the amount of tax you pay on your profits.
For most self-employed individuals working from home, once you begin earning more than £1,000 annually, understanding how to calculate and claim your expenses becomes a critical part of your financial routine.
Common Expenses That May Be Allowable
When working from home, you are eligible to claim part of your household costs as business expenses. These expenses fall into a few broad categories.
Utility Bills
You can claim a proportion of your gas, electricity, and heating bills if you use a part of your home to run your business. The amount you claim should reflect the number of rooms used and how long they’re used for work during the day.
For example, if your house has six rooms and you use one of them as your home office, you might claim one-sixth of your total electricity and gas bills. If you only work from home part-time, the proportion should be adjusted accordingly.
Internet and Telephone Costs
If you use your home internet or landline phone for business purposes, you can claim the business portion of these costs. If you also use them for personal reasons, only the part that relates to your business is allowable.
For mobile phones, itemised bills can help you determine the proportion of business versus personal usage. Estimations are acceptable as long as they are reasonable and can be justified with supporting evidence.
Office Supplies and Stationery
You can claim the cost of items such as printer paper, pens, notepads, ink cartridges, and other office supplies that are used solely for business. Similarly, postage costs for sending business-related documents or packages are allowable.
These expenses tend to be straightforward and can usually be supported with receipts, invoices, or credit card statements.
Mortgage Interest and Rent
If you own your home and are paying off a mortgage, you cannot claim the full mortgage payment. However, you may claim a proportion of the interest element of the mortgage as a business expense, based on how much of the home is used for work.
If you rent your property, a similar approach applies. You may claim a share of the rent that corresponds to your work-related use of the property. You’ll need to ensure that the room used for business is not shared for personal activities during work hours.
It’s important to note that sole traders who own their homes cannot rent a room in their own house to their business. This is reserved for limited companies and requires more formal arrangements, including contracts and records of rent payments.
Council Tax and Business Rates
In most cases, if you use a room in your house as a home office, you may claim a reasonable share of the Council Tax as a business expense. However, if a room is used solely and permanently for business, or if customers visit your home regularly, you may be required to pay business rates instead.
Examples of businesses that may fall under business rate liability include those that run a salon from home or have converted a garage into a gym used by paying clients. It’s important to assess whether your activities fall under personal or commercial use, as this affects what can be claimed.
Repairs and Maintenance
If you need to carry out repairs or maintenance on the room you use for work, the entire cost may be claimed as a business expense. This might include redecorating your home office or fixing a window in that room.
If the repairs cover the whole house, such as fixing the roof or plumbing, you can claim a proportion based on business use. Again, repairs to parts of the house not used for business, like the kitchen or bathroom, cannot be claimed.
Water Bills and Eligibility
Water bills are generally not considered allowable expenses unless your business uses a significant amount of water as part of its operations. For example, if you run a car-washing or dog-grooming business from home, you may be eligible to claim part of your water bills.
Simply using more water because you spend time working from home does not qualify. HMRC expects the expense to be directly linked to the needs of the trade.
Calculating Business Use Proportion
The process of working out how much you can claim for shared costs like rent, electricity, and heating depends on factors such as the number of rooms used and how many hours each day they are used for work.
For instance, if you work from one room in a six-room house for 40 hours a week, you’ll divide the cost by the number of rooms and further adjust it based on the proportion of the week the room is used for work.
If your electricity bill is £900 a year, and you use one room out of five exclusively for work, your base claim might be £180. If you only use it for business during standard working hours on weekdays, the actual amount you claim might be closer to £130 or £140 depending on exact usage.
Keeping clear records, such as utility bills and a log of working hours, can help you make accurate calculations and back them up if questioned.
Dual-Use Items and Justification
For equipment, subscriptions, and services that serve both personal and business functions, such as laptops, software, or mobile plans, you must assess what proportion of the usage is for business. Only this share is deductible.
Estimating usage can be tricky, but you should use a consistent and rational method. For example, you might determine that you use a particular device for business 70 percent of the time, and therefore claim 70 percent of its cost.
Good record-keeping and regular reviews of your estimates are essential to ensure accuracy and compliance with HMRC’s expectations.
Simplified Expenses: An Overview
For those who find it challenging to apportion actual household expenses accurately, HMRC offers a simplified method to claim allowable expenses. These simplified expenses are designed to ease the administrative burden on sole traders and small business owners. Instead of calculating each individual bill, you can apply a flat rate to reflect your working hours at home each month.
This option is particularly helpful if your business use of home is relatively consistent and you prefer not to track detailed data for every utility or space. It can also be helpful for reducing time spent on accounting tasks and ensuring your claims remain consistent throughout the tax year.
Conditions for Using Simplified Expenses
To use the simplified flat-rate method, there are specific conditions you must meet. First and foremost, you must work from home for at least 25 hours per month. If you work fewer hours, you are not eligible to use this method and must rely on actual costs and proportionate calculations.
The flat-rate amount you can claim depends on how many hours you work from home during the month. These rates are set by HMRC and cover general household running costs such as heating, electricity, and rent. They do not include telephone or broadband costs, which must still be claimed separately based on actual business usage.
Simplified Expense Rates
The monthly flat rates currently allowed by HMRC for business use of home are as follows:
- For 25 to 50 hours worked per month, you can claim £10
- For 51 to 100 hours, you can claim £18
- For 101 hours or more, you can claim £26
These rates are applied per month, so if your working pattern fluctuates throughout the year, your total annual claim should reflect the number of hours worked in each specific month. For example, if you work 60 hours in one month and 110 in the next, your claim for those two months would be £18 and £26 respectively.
What Simplified Expenses Do and Don’t Cover
The simplified expense method is designed to cover a share of general household running costs related to working from home. This includes heating, lighting, power, and a portion of other operational costs like home insurance or property wear and tear due to business use.
However, not everything is included in the flat-rate calculation. Telephone bills, broadband charges, and any costs for equipment or services used exclusively for business must be calculated separately using actual cost and usage proportion. This ensures that you can still claim for expenses directly tied to business activity even when using a flat rate for general home costs.
Comparing Simplified Expenses with Actual Costs
Using simplified expenses may be easier, but it’s not always the most tax-efficient option. To decide which method is best, you should compare your potential claim using actual business costs against the flat-rate allowance. In many cases, claiming based on actual costs may result in a higher deduction, especially if you dedicate a large area of your home to business or your utility costs are high.
Let’s consider two examples to illustrate this point.
Example 1: Using Simplified Expenses
Jane is a self-employed copywriter who works from home in a one-bedroom flat. She works roughly 90 hours per month from her desk in the living room. Based on HMRC’s simplified expense rate, she can claim £18 per month or £216 for the year.
Jane’s utility bills and household costs come to approximately £1,500 annually. Her business space accounts for around 20 percent of the total living space and is used for work during normal business hours five days a week.
Using the simplified method saves Jane time and ensures consistency, but it may result in a smaller deduction than if she calculated her actual business use of utilities.
Example 2: Using Actual Costs
John is a self-employed graphic designer who uses a dedicated office in his three-bedroom home. His household utility bills total £2,000 per year. He uses one of five rooms as a workspace for 40 hours per week.
By calculating the cost proportionally, John can claim 20 percent of £2,000, equaling £400 annually. This is significantly more than the £312 he would be able to claim under the simplified method for working over 101 hours a month.
In John’s case, using actual costs is more beneficial, even though it takes more effort to calculate and document.
How to Work Out Actual Business Costs
If you decide not to use simplified expenses, you’ll need to keep detailed records and apply reasonable methods to apportion shared costs. The most common method is to divide household bills based on the number of rooms in your home and the number of hours the room is used for work.
Let’s take a closer look at how this works for various categories.
Utility Bills
To apportion gas, electricity, or water costs, start by counting the total number of usable rooms in your home (excluding bathrooms and hallways). Identify how many of those rooms are used for business purposes and for how long.
For example, if your home has five rooms and one is used as an office, you might divide the bill by five to get the base proportion. If you only use the room for eight hours a day, you might further reduce the proportion accordingly to reflect the fact that it’s not in use 24/7.
Rent or Mortgage Interest
Similar calculations apply to rent or mortgage interest. Remember, you can only claim the interest portion of your mortgage, not the full repayment. Calculate the total interest paid in the tax year, then apportion it based on business usage of the home.
If you’re renting and your monthly rent is £1,200, using one of six rooms full-time for your business would entitle you to claim £200 per month or £2,400 annually, assuming full-time business use.
Council Tax
You can also apply these calculations to Council Tax. Using the same principle of room division and time used, determine a reasonable share of the annual bill that relates to business use. Note that claiming too much or declaring a room as permanently non-domestic may trigger liability for business rates, so consider this carefully.
Mixed-Use Assets and Items
Many self-employed workers use assets or services for both personal and business purposes. This includes mobile phones, internet access, and even some home improvements. Only the business-use portion of these items can be claimed as allowable expenses.
For example, if you use your internet connection for both personal and business use, you must estimate the proportion of time it is used for business. If business activity accounts for 60 percent of the total usage, you can claim 60 percent of the cost as a business expense.
A good practice is to base these estimates on real data when possible. For example, you could track call durations, working hours, or internet data usage over a representative period and use that to justify your claim.
Keeping Records for Expense Claims
Whether using simplified or actual costs, maintaining accurate records is essential. HMRC requires that you keep records for at least five years after the 31 January submission deadline for the relevant tax year.
These records should include:
- Utility bills and rent statements
- Mortgage interest statements
- Telephone and broadband invoices
- Receipts for office supplies and repairs
- A log of working hours or room usage (especially if claiming a proportion of household expenses)
These documents not only support your claims but also help you stay organised and prepared in case of an HMRC review or enquiry.
Combining Expense Methods
It is possible to mix methods when claiming expenses, but this should be done with consistency and clarity. For example, you might use simplified expenses for your general home office costs but calculate actual costs for your broadband and phone usage.
This approach can be beneficial if some expenses are straightforward and consistent, while others are higher in value and worth calculating precisely. However, avoid switching back and forth between methods for the same expense category unless there is a clear and documented reason for doing so.
Considerations When Scaling a Home-Based Business
As your home business grows, your expenses may become more complex. You might start using more rooms, invest in better equipment, or hire subcontractors. At this stage, your expense claims may need to be reviewed to ensure they reflect the business’s new scale.
Growth may also bring additional compliance requirements. If your revenue exceeds the VAT threshold, you’ll need to begin charging VAT and filing VAT returns. You may also need to consider forming a limited company or leasing separate business premises, both of which change the nature of your allowable expenses.
Evaluating your expense strategy annually is a good habit to develop. It ensures your claims remain accurate and that you’re taking advantage of all available deductions while staying within HMRC’s guidelines.
When Your Home Is Your Primary Place of Business
For many sole traders, their home is not just a convenient location; it is the main base for their business activities. Whether you’re a freelance designer with a dedicated studio, a virtual assistant working from a home office, or a consultant conducting meetings via video calls, the home becomes the central operational hub.
In these cases, HMRC generally accepts that part of the household running costs are attributable to business use. However, the extent to which you can claim depends on how much of your home is used for work and whether this usage is exclusive and regular. Occasional or incidental use does not typically justify large expense claims.
If you have a room used exclusively for business, such as a converted study or garden office, you may claim a greater proportion of costs such as electricity, heating, and even repairs. But using the kitchen table to answer emails for an hour each evening will only allow a minimal claim, if any.
Exclusive vs. Shared Use of Space
Understanding the difference between exclusive and shared use is key when calculating allowable expenses. Exclusive use means the space is used only for business, with no personal activity taking place there. Shared use means that the space serves both business and personal functions.
For example, if you use your spare bedroom exclusively as an office, with a desk, computer, filing cabinet, and work-only storage, you can typically claim a higher share of household costs. If that same room also serves as a guest room on weekends or doubles as your TV lounge in the evening, then only a reduced portion of the expenses will be considered valid for business use.
HMRC may expect you to adjust the proportion of your claim accordingly. Using reasonable estimates and keeping a log of how the room is used during the week will help you make accurate claims that are justifiable if reviewed.
Examples of Different Home Working Setups
Let’s explore a few real-world examples to understand how different working setups impact expense claims.
Example 1: Full-Time Use of a Dedicated Office Room
Emma is a freelance copywriter who works from a small office in her two-bedroom flat. She uses one room exclusively for business five days a week, from 9 a.m. to 5 p.m. She pays £1,200 annually in electricity, £1,800 in rent, and £1,500 in Council Tax.
She calculates that her office accounts for 25 percent of her total living space. She uses actual costs to claim a proportional share:
- Electricity: £1,200 x 25 percent = £300
- Rent: £1,800 x 25 percent = £450
- Council Tax: £1,500 x 25 percent = £375
Her total allowable home office expenses would therefore be £1,125 for the tax year.
Example 2: Part-Time Use of a Shared Living Space
Liam is a self-employed music tutor who uses his living room for teaching four evenings a week. The room is also used by the family for watching TV and socialising. He estimates that the room is used for business around 20 percent of the time.
His annual household bills total:
- Electricity: £900
- Heating: £600
- Rent: £7,200
Since the room is not exclusively used for business, Liam reduces his claim proportionally:
- Combined utilities: £1,500 x 20 percent = £300
- Rent: £7,200 x 20 percent = £1,440
His total allowable expenses would be £1,740. Although this amount is higher than some, Liam’s claim must be well-supported with time logs and a clear explanation of how the space is used.
Equipment, Tools, and Supplies
In addition to household costs, there are many other expenses that can be claimed when you’re self-employed and work from home. These relate to the tools, equipment, and supplies necessary for your business.
For example, you can claim expenses for:
- Computers, printers, and monitors used for business
- Office furniture like desks and chairs
- Software subscriptions used solely for work
- Cloud storage or digital communication tools
- Professional journals or industry-specific publications
The rules require that these items must be used mainly for business purposes. If a laptop is used for both personal and business reasons, you’ll need to estimate the business portion of its use.
Also, remember that expensive assets may need to be claimed as capital allowances rather than standard business expenses. These are spread over multiple years through annual investment allowances.
Business Insurance and Security Costs
Some home-based business owners may take out specialist business insurance policies. These might include public liability insurance, professional indemnity insurance, or contents insurance for business equipment.
Premiums for such policies are usually fully allowable, as they relate directly to business operations. Similarly, if you install a separate alarm system or enhance your home security because of business requirements (such as storing sensitive data or valuable equipment), the associated costs may be claimed in part or full. Always retain policy documents and receipts to demonstrate the business relevance of these expenses.
Industry-Specific Expense Considerations
Some trades and industries have unique allowable expenses based on the nature of their work. Let’s explore a few examples of how home-based self-employed individuals across various sectors might approach their expense claims.
Creative Professionals
Writers, designers, illustrators, and other creatives often need a quiet, focused workspace and access to specialist software. Their expenses may include:
- Design software subscriptions
- Industry association memberships
- Printing and publishing costs
- Web hosting and domain registration
- Equipment upgrades for graphic work
Creative professionals often operate from a dedicated home studio, allowing them to claim a more generous share of home costs.
Online Sellers and eCommerce Businesses
Self-employed individuals who run eCommerce shops from home often use part of their property to store inventory, manage shipments, and handle customer service.
Claimable expenses may include:
- Packaging supplies and postal costs
- Inventory management software
- Business portion of utilities used for order processing
- Office or storage space allocation
- Advertising and marketing expenses
Care should be taken when using parts of the home for physical inventory, especially if customers collect items from the property, which could alter the tax treatment of the space.
Therapists and Coaches
Professionals such as counselors, fitness coaches, and alternative health therapists may see clients in a dedicated home space or run virtual sessions.
Claimable costs may include:
- Equipment for virtual sessions
- Software used for scheduling or online appointments
- Cleaning costs for a dedicated therapy room
- Client refreshments, if offered during in-person visits
- Liability insurance for client interactions
It’s important that such rooms are documented and not used for other personal functions if full claims are made.
Less Obvious Allowable Expenses
In addition to the more well-known deductions, there are several lesser-known expenses that you may be able to claim when running a home-based business.
Bank Charges
If you have a separate bank account used solely for business, charges associated with that account are usually allowable. These include monthly fees, overdraft interest, and transaction charges.
Business Subscriptions
Memberships to trade bodies, industry groups, or online platforms necessary for your profession can often be claimed. For instance, a freelance writer might claim membership fees for a professional authors’ society.
Training and Development
Courses or webinars that maintain or enhance your skills may be deductible if they relate directly to your current line of business. General education or training for a new field is not usually allowable.
Business Use of a Vehicle
If your business requires occasional travel, even from home, you may be able to claim a portion of your car costs, including fuel, insurance, and maintenance. Alternatively, mileage can be claimed using HMRC’s flat rate per mile method.
Keeping Evidence and Staying Organised
Whether you claim actual costs or use simplified expenses, detailed records are essential. HMRC expects you to retain receipts, invoices, and records for all claims made, typically for at least five years after the relevant tax year.
Good record-keeping should include:
- Copies of utility bills and rent or mortgage statements
- Itemised phone and internet bills with business-use estimates
- Receipts for business purchases and repairs
- Notes on working hours and room usage patterns
- Justifications for mixed-use apportionment
Accounting software can be a helpful tool for tracking these details, though simple spreadsheets or notebooks are also acceptable as long as the data is consistent and well-maintained.
Conclusion
Running a business from home brings with it a unique set of opportunities—and responsibilities. Whether you’re a freelancer, consultant, creative professional, online seller, or service provider, understanding what you can and cannot claim as allowable expenses is essential for effective financial management and legal compliance.
Throughout this series, we’ve explored the principles behind allowable expenses, the practicalities of calculating them using either actual costs or simplified expenses, and the nuances that apply to different working setups and industries. What becomes clear is that the more accurately you assess your business use of home, the more legitimate deductions you can make—helping to lower your taxable profits and keep your finances in healthy shape.
It’s not just about reducing your tax bill. Claiming allowable expenses correctly gives you a clearer picture of your real business costs and profitability. It can inform pricing decisions, budgeting, and future planning. It also strengthens your record-keeping and readiness in the event of an HMRC review.
Yet this process requires care. The rules around what constitutes exclusive business use, how to apportion shared costs, and how to handle dual-purpose items can be subtle. Many claims rely on reasonable estimations and consistency over time. That’s why keeping good records, using fair methods of calculation, and regularly reviewing your working setup are so important.
For some, the simplified expense method offers ease and peace of mind, while others may benefit more from calculating actual costs, particularly if they use a dedicated space or incur significant utility expenses. There’s no single approach that fits every home-based business, so the key is choosing the method that best reflects your situation.
As the number of self-employed people working from home continues to grow, the ability to confidently and correctly claim allowable expenses is becoming an essential skill. If ever in doubt, consulting a qualified tax professional can provide clarity and potentially uncover deductions you hadn’t considered—ensuring you make the most of your entitlements while remaining compliant with HMRC regulations. In the end, managing your allowable expenses well isn’t just good practice—it’s a vital part of running a successful and sustainable home-based business.