Use of Home Allowance – How Contractors & Sole Traders Can Benefit

These days, whether you’re working full-time or mixing it up with a hybrid model, working from home has become the new normal for a lot of people. This is especially true for contractors and sole traders, who often set up their businesses right from their home offices. It’s a great way to save on commuting time and cut down on expenses.

However, while working from home can help you save money, many people don’t realise they might be missing out on some valuable tax relief. If you’re using part of your home for business purposes, you could be eligible for a . This is a simple way to lower your tax bill by covering some of your household costs.

In this article, we’ll dive into what the home office allowance is, who can claim it, how it works for contractors and sole traders, and the differences between the simplified and detailed methods. Whether you’re a contractor running a limited company or a sole trader handling your own tax return, this article is here to help you maximise the benefits of working from home.

The home office allowance is a tax relief that lets self-employed people and contractors claim part of their household expenses. If you’re using part of your home for business purposes, you might be eligible to deduct expenses like electricity, heating, internet, and even rent or mortgage interest.

HMRC allows self-employed and certain company directors to claim these costs as business expenses. This helps reduce the amount of profit you’re taxed on, which can lower your tax bill.

What Counts as Working from Home?

Working from home means you’re handling your business tasks right from your own space instead of heading to a different office. When it comes to taxes, HMRC takes a close look at how often and consistently you work from home to determine if you can claim home office expenses.

It doesn’t have to be a full-time gig. You might divide your time between home and other places, like a client’s site or a coworking space. What really counts is that you’re regularly doing meaningful work from home.

What HMRC Looks For:

To be eligible for the home office allowance, HMRC generally expects you to:

• Work from home on a regular basis, not just occasionally
• Designate part of your home as your primary workspace (even if it’s a shared area)
• Demonstrate that you need to work from home, rather than just finding it more convenient

For example, if you’re a self-employed designer who spends three days a week working from home, that definitely qualifies. But if you’re only checking emails at home once a month, that probably won’t count.

The home office allowance is available to a wide range of people who work for themselves or run their own businesses. If you regularly work from home and use part of your home for business, you may be able to claim.

1. Contractors (Inside and Outside IR35): If you're a contractor working through a limited company, how you claim expenses really hinges on your IR35 status.

• Outside IR35: When you're outside IR35, you have the option to claim certain home office expenses through your limited company. This can cover things like your electricity, internet, and even a small portion of your rent or mortgage interest, as long as you're regularly using your home for business. In some situations, you might even pay yourself rent from the company, but it's crucial to do this properly, often requiring a rental agreement.
• Inside IR35: On the flip side, if your contract is inside IR35 and you're using an umbrella company, claiming home office costs becomes trickier. This is because you're treated more like an employee, and most of your expenses are typically covered through your PAYE setup.

2. Sole Traders: For sole traders, claiming a home office allowance is a bit more straightforward. Since you and your business are legally one and the same, you can include this allowance in your self-assessment tax return. You can opt for the flat rate method (simplified expenses) or calculate your actual costs. Either way, you'll need to demonstrate that you regularly use your home for business purposes.

3. Freelancers: Freelancers who juggle multiple clients and operate from home can also make claims. Whether you're a designer, writer, developer, or consultant, if you're using part of your home to provide your services, you might be eligible for the allowance. Just like sole traders, freelancers can choose between the flat rate or actual cost method.

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Key Eligibility Requirements

To claim the home office allowance, you must meet a few simple conditions:

• You work from home regularly - not just the odd day now and then.
• Part of your home is used for business - this could be a dedicated room or a shared space like the kitchen table, depending on your setup.
• You run a business - this includes sole traders, freelancers, and limited company directors who actively work from home.

HMRC provides two distinct methods for claiming expenses: the Simplified Expenses Method and the Actual Costs Method. Each method has its own perks, depending on how much time you spend working from home and how detailed you want to get with your record-keeping.

1. Simplified Expenses (Flat Rate Method)

The flat rate method is the easier choice. HMRC has set fixed monthly rates based

on the number of hours you work from home each month, so you won’t have to keep track of individual bills or calculate percentages.

This method covers things like electricity, gas, and some internet costs.However, it doesn’t include business phone calls or internet used exclusively for business, you’ll need to claim those separately.

How to Calculate Use of Home Allowance using Simplified Expenses Method

Steps:

1. Count how many hours you work from home each month.
   
   
2. Check the above HMRC’s flat rate table.
   
   
3. Multiply the rate by the number of months worked from home.

HMRC offers a simplified expenses checker that helps you compare the amount you could claim using simplified expenses against the amount you might be able to claim by calculating your actual costs.

Example Calculation:

Imagine you’re a freelancer putting in 30 hours a week from home. That comes to about 120 hours a month. According to HMRC guidelines, you could claim £26 each month, which adds up to £312 over the year.

This method is great if you use your home office moderately and prefer a straightforward way to claim without diving into complicated calculations or saving utility bills.

Pros and Cons of Simplified Expenses Method

2. Actual Costs Method

The actual cost method is more detailed. You work out the percentage of your household bills that relate to business use. This includes things like:

• Electricity
• Heating
• Council tax
• Water bills
• Rent or mortgage interest
• Broadband and phone
• Home insurance (if it covers business activity)
• Cleaning costs (if the area used is regularly cleaned for business)

You’ll usually divide your costs based on how many rooms you use for business and how long you use them.

How to Calculate Home Office Allowance Using Actual Costs Method

Steps:

1. List all your home running costs (gas, electricity, rent, internet, etc.).
   
   
2. Count how many rooms your home has.
   
   
3. Work out how many rooms you use for work and for how long.
   
   
4. Divide the costs by room and by time spent working.
   
   
5. Add up the business portion of each cost.

Formula:

(Total Bill × Business Room Use %) × Work Time Use % = Business Cost

Example Calculation: 

• You live in a 5-room house.
• Use 1 room as a home office 5 days a week, 8 hours a day.
• Monthly electricity bill = £100

Step 1: Room use = 1 room out of 5 = 20%
Step 2: Time used = 8 hours out of 24 = 33%
Step 3: £100 × 20% = £20
Step 4: £20 × 33% = £6.60

You can claim £6.60 of that month’s electricity bill as a business expense. Repeat this process for each bill.

You’ll need to keep records of bills and your working pattern to support your claim.

Pros and Cons of Actual Costs Method

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Want to see how much you can claim? GoForma’s Use of Home Allowance Calculator gives you a quick estimate based on your working hours and home costs.

Utilities: Heating, Electricity, and Water

If you’re working from home, you can actually claim a portion of your heating, electricity, and water bills. For example, if you work from a dedicated room in your house, you can work out the share of energy and water bills used during your working hours.

To figure this out, you’ll need to divide the costs based on the space you’re using for your business and the hours you spend there. If you use the room for other things too (like a guest bedroom), your claim should reflect that.

Rent and Mortgage Interest

As a sole trader, you can claim a portion of your rent or mortgage interest (but not the entire mortgage payment) as a business expense.

For rent, you can include a part of your rent based on how much space and time you use for work.

When it comes to mortgage interest, you can claim a share of the interest, but remember, you can’t include the capital repayment.

If you’re a director of a limited company, you typically can’t claim rent or mortgage costs through the company unless there’s a formal rental agreement. In those situations, it’s a good idea to consult with a limited company accountant.

Broadband and Phone Bills

You can also claim for the business use of your internet and phone.

If you have a separate phone line or broadband connection just for your business, you can claim the full amount.

However, if you’re using the same connection for both personal and business purposes, you’ll need to split the costs and only claim the business portion. For example, if you’re using the internet for work 50% of the time, you can claim 50% of the bill.

Any calls made strictly for business, like client meetings or supplier discussions can also be included in your claims.

Office Furniture and Equipment

You can claim for any furniture and equipment you use for work, which includes:

• Desks and chairs
• Monitors and laptops
• Printers, keyboards, and other office accessories

These items are considered capital assets, so you can either claim them through capital allowances or treat them as expenses, depending on their cost and type. For example, a simple office chair might be treated as an expense, while a new laptop could be classified as a capital item.

Repairs and Maintenance

When it comes to repairs and maintenance in your home office, you can actually claim a portion of those costs.

For example, if you decide to give your home office a fresh coat of paint or repair a broken radiator in that space, those expenses can be considered business-related.

If you’re making general repairs throughout your home like fixing the roof or servicing the boiler, you can also claim a part of those costs, as long as you use your home for work.

Again, you’ll need to apportion the expense based on how much of your home is used for business.

Can Directors Claim Rent from Their Limited Company?

Absolutely! If you're using your home as an office, you can claim rent from your limited company. The company can pay you for the business use of your property, and this is distinct from your salary or dividends.

However, it’s crucial to have a clear agreement in place between you and your company. Without this, HMRC might turn down your claim.

The rent you receive is considered income, so you’ll need to report it on your Self Assessment tax return. Meanwhile, the company can treat this as a legitimate business expense.

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Risk of CGT (Capital Gains Tax) on Sale of Home

If a room in your home is exclusively used for business and you’ve claimed part of your mortgage interest or received rent, you might lose some of your Private Residence Relief when it comes time to sell your property.

This could mean you’ll have to pay Capital Gains Tax (CGT) on a portion of the profit from selling your home. To avoid this issue, many people opt to use their home office for dual purposes, like a guest bedroom or for personal tasks as well.

HMRC generally accepts that rooms used for both business and personal purposes don’t trigger CGT.

Expenses vs Salary/Dividend Options

You might be wondering whether it’s more beneficial to claim home office costs as expenses or to pay yourself through salary or dividends.

• Expenses: Claiming home office costs as business expenses reduces the company’s profit, which in turn lowers its Corporation Tax bill.
• Salary: Paying yourself a salary increases your personal income tax and National Insurance contributions. It also raises the company’s employment costs.
• Dividends: Dividends are usually more tax-efficient than salary, but you can't link them directly to home office costs.

Simpler Rules – Costs Offset Against Self-Assessment Income

If you're a sole trader, you report your business income and expenses through a Self Assessment tax return. Home office costs are considered allowable business expenses, meaning you can deduct them from your income before calculating your tax.

You have two options here: you can either go with a flat rate method or calculate your actual costs based on your household bills. Both methods are accepted by HMRC, so it really comes down to what works best for you.

How to Record and Justify Claims

Whichever method you pick, keeping clear records is key. If you choose the flat rate, just keep track of how many hours you work from home each month.

For actual costs, keep:

• Utility bills
• Rent or mortgage interest statements
• A log of your working hours
• Notes on how you calculated your percentage split

If HMRC decides to review your return, they might ask how you worked out your claim. Having clear notes and receipts will help support your figures.

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Working from home offers a range of tax benefits, particularly for sole traders and contractors. The home office allowance can help lighten your tax load by covering some of your household expenses. Whether you opt for the flat rate or the actual costs method, it’s definitely worth exploring what you can claim.

At GoForma, our small business accountants have a wealth of experience working with contractors, sole traders, and freelancers. They’re here to ensure you claim correctly, avoid any errors, and minimise your tax bill as much as possible. Book a free consultation with our small business accountant today to maximise the benefits of your home working setup and ensure your claims are accurate.

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FAQs on Self-employed Work from Home Allowance

Can I claim if I work from a garden office?

Yes, you can claim if you work from a garden office, as long as you use it for business purposes. You may be able to claim part of the costs, such as lighting, heating, and internet.

How much can I claim without receipts?

If you use the simplified expenses method, you don’t need to keep receipts. HMRC allows a flat monthly rate based on how many hours you work from home each month. For example, if you work 25 to 50 hours a month, you can claim £10. This makes it easier for small business owners who don’t want to track every bill.

How much to claim for use of home as office?

The amount you can claim depends on how you work out your costs. If you use the simplified expenses method, you can claim up to £26 per month based on your working hours. If you use the actual cost method, you’ll need to calculate a share of your household bills—like heating, electricity, internet, and rent—based on how much of your home you use for work and for how long.

What is the use of home allowance?

The use of home allowance lets self-employed people, contractors, and sole traders claim part of their home running costs as business expenses. It covers things like heating, lighting, internet, and rent if you use a room at home to work. This allowance helps reduce your taxable profit, which can lower your tax bill.

What qualifies as a home office?

A home office is a space in your home that you use mainly for work. It could be a spare room, a section of a room, or even a garden office, as long as it’s set up for business tasks like calls, emails, admin, or meetings. To claim expenses, the space should be used regularly for work and not mainly for personal activities.

Can I claim the Home Office Allowance if I occasionally work from home?

If you only work from home now and then, you might not meet the rules for claiming the Home Office Allowance. HMRC expects your home to be used often and mainly for work. If you only work a few hours a week at home, it likely won’t count. To claim under simplified expenses, you must work at least 25 hours a month from home.

Can I claim the Home Office Allowance if I rent my home?

Yes, you can still claim the Home Office Allowance if you rent your home. It doesn’t matter whether you rent or own the property—what matters is that you use part of it regularly for work. If you work from a rented house or flat, you can claim the flat-rate allowance to cover some of your work-related household costs.