Helen Thornley is a Technical Officer with the Association of Taxation Technicians, with a focus on personal taxes.
Sole trader homeworking expenses are the part of the tax return where our readers either leave money on the table or claim more than they can defend. Both mistakes are avoidable, and the difference is knowing the rules before the return goes in.
The timing is deliberate: the 31 January deadline is twelve weeks away, basis period reform is into its fourth year of transitional profits, and the homeworking rules changed again in April 2026. Check each figure against your own position before filing.
Many sole traders use the simplified expenses method for the home office allowance instead of actual costs. When is that the right choice, and when does it leave money on the table?
In general, a sole trader can claim tax relief for costs which have been ‘wholly and exclusively’ incurred for the purposes of the trade. For self-employed individuals who run their business from home, this can include the business proportion of their household running costs.
Traders have the choice of calculating the actual costs incurred and apportioning them between business and private use, or using the simplified expenses method. The latter reduces administration by allowing traders to claim a flat rate amount without needing to supply evidence of costs incurred.
There are three tiers of claim based on the hours the individual works at home each month:
- £10 a month for 25 to 50 hours of homeworking
- £18 a month for 51 to 100 hours
- £26 a month for 101 hours or more
This is intended to help to give relief for running costs including heat, light, power, cleaning and metered water charges, which means that no further relief can be claimed on those items. There is no relief under the simplified method for individuals who work less than 25 hours a month from home.
Money will be left on the table if the individual’s business use of these expenses is greater than the flat rate allowance. The only way to establish this is to carry out an actual calculation of the costs involved and apportion it between business and private use.
Money can also be left on the table if the individual doesn’t appreciate that the flat rate approach is for household running costs only. It does not make allowances for telephone or broadband costs, or fixed costs including mortgage interest, rent, insurance, repairs and maintenance, or business rates and council tax. In general, a separate deduction can be claimed for the business proportion of these expenses in addition to the flat rate amounts, provided they can be evidenced.
Apportionment must be carried out carefully. Where there is an itemised bill, for example a telephone bill which shows actual business call costs, that should be used. Otherwise, it might be appropriate to apportion based on the amount of the property used by the business or the amount of time spent working in the business.
For home insurance, it isn’t permitted to claim relief if there is also a separate business insurance policy. For repairs and maintenance, while repairs to the whole of the building can be apportioned between business and private, no relief is available for repairs to parts of the house which are not used in the business, such as painting a child’s bedroom.
What are the most common mistakes you see that trigger HMRC queries on home working deductions?
HMRC is unlikely to challenge flat rate claims, although traders should still be prepared to evidence the amount of time they work at home, especially if claiming the higher tiers.
In general, claiming relief for significant homeworking costs is most likely to trigger interest from HMRC. HMRC can ask not just for evidence of the costs incurred, but also whether the basis of apportionment is reasonable. Common mistakes would be failing to keep records of costs incurred or over-estimating the business proportion of them.
For example, claiming relief for 50% of water costs when the individual only carries out their trade for one day a week from home may well be questioned. There would need to be a specific reason why the business was using 50% of the water supplied to the property, which the trader should be prepared to explain and evidence.
HMRC is also likely to look closely where the trader is claiming a percentage of fixed costs such as mortgage interest. It’s important to have good evidence of the costs, how you calculated the claimable amount, and only claim the interest element, not any of the capital element of the repayment.
The basis period reform has changed how some sole traders report their income. What should they check before filing their 2026/27 return?
Thanks to basis period reform, sole traders now need to report their profits on a tax year basis, regardless of their accounting year end. This means for 2026/27 traders need to report their taxable profits arising between 6 April 2026 and 5 April 2027 (or 1 April 2026 to 31 March 2027, which is considered to be equivalent).
Many sole traders already prepared their accounts to 5 April (or 31 March) each year, so the changes brought by basis period reform will have had little impact. However, anyone who had a different year end may well have found that the process of moving to the new basis period resulted in the generation of transitional profits when these rules came into force in 2023/24.
Any transitional profits can be spread over five years, so 2026/27 is the fourth year in which transitional figures may need to be reported and added to any trading profits generated each year.
If the trader has lower taxable profits than usual, it is possible to accelerate the taxation of transitional profits to save tax in future, reducing the balance to be spread over the remainder of the five-year period. It might be beneficial if there is a chance of applying a lower tax rate than usual to those profits.
Where does HMRC draw the line on “business use” of a home? What counts, what does not, and what documentation matters most?
For those using the simplified method, the key requirement is to keep evidence to show the hours worked at home. HMRC will be looking for hours spent on ‘core’ business activities, such as providing goods and services, maintaining business records or marketing and obtaining new business.
Evidence could include a diary note of hours worked over a representative number of months. Ideally this would cover the whole year, but even evidence from a couple of months would be helpful in the event of an enquiry.
For those claiming a percentage of their actual costs, it will be important to keep both evidence of the costs incurred, and details of the method of apportioning between business and private. It is important to be able to show that this split was reasonable.
Most business records need to be kept for at least five years following the 31 January after the end of the tax year to which they relate.
Traders who own their home should be careful if any space in the home is used exclusively for the purposes of the business. If so, this could lead to a restriction in the amount of private residence relief available, which could give rise to a capital gains tax liability on part of any gain made when they come to sell the property. One solution is to make sure the home office also has a secondary personal use: storing personal items, watching TV, or using the room as a music practice or games room can help demonstrate private use of the home office, avoiding a restriction of private residence relief.
If a sole trader moves to a limited company, how does their home working position change?
When a sole trader incorporates, one of many things to change is how they get relief for working at home. They will now be a director of their own company and, in a similar way to the simplified expenses, they need to choose whether to use a simplified method or the actual method of determining the costs incurred.
The simplest approach is for the company to pay a flat rate £26 a month allowance for homeworking to the director. This is tax-free in the hands of the individual and tax-deductible for the company.
However, if this does not fully cover the actual costs incurred, it is possible for the company to reimburse the director for the company’s share of the household running costs. This will, though, require evidence of those costs, and how they have been split between business and private.
Since 6 April 2026, it has no longer been possible for an employee or director to claim tax relief on any costs not reimbursed by their employer, whether under the flat rate allowance or actual costs. So it is necessary for the company to physically pay any extra costs.
The individual could charge rent to the company, and then offset the related costs, but any profit over the costs would be taxable for the individual. The property allowance, which allows an individual to receive up to £1,000 of property income tax-free, is not available when the rent comes from a connected party such as their own company.
The records win the relief: the checklist on hours, apportionment and evidence is the part to keep for filing season. If you are weighing up the structures, our guide to sole trader versus limited company covers the wider picture, and our walkthrough of claiming home business expenses shows the practical steps.
