Category: Professional

Working from home creates a deceptively simple tax question: if the home is also a workplace, how much of its cost belongs to the business?

For a UK sole trader, there are usually two broad approaches. Simplified expenses use a monthly flat rate based on hours worked at home. The actual-cost approach identifies relevant household costs and applies a reasonable business proportion. Neither method is automatically best. The useful choice is the one that is available, supportable and proportionate to the amount involved.

This is general information, not individual tax advice. Company directors, employees, partnerships with corporate partners and people with unusual property arrangements can face different rules.

Option one: simplified expenses

HMRC’s simplified working-from-home rates apply when a self-employed person works at home for at least 25 hours in a month. The current published monthly rates are:

• 25 to 50 hours: £10
• 51 to 100 hours: £18
• 101 hours or more: £26

The attraction is administrative rather than generous tax relief. There is no need to apportion heating, electricity, Council Tax, rent or mortgage interest individually. A defensible record of hours is still needed.

The flat rate does not cover the business proportion of telephone or internet bills. Those costs can be considered separately using a reasonable method. Simplified expenses are not available to every structure: HMRC limits them to sole traders and business partnerships with no corporate partner.

Option two: actual costs

The alternative is to calculate the business share of relevant household expenses. HMRC lists examples including heating, electricity, Council Tax, mortgage interest or rent, and internet and telephone use.

Only the business element is allowable. A reasonable calculation might consider:

• the number of rooms used for work compared with the total number of usable rooms;
• how much time the room is used for business;
• whether the cost actually varies with business activity; and
• any evidence that makes one room materially more expensive to run.

There is no universal “divide everything by the number of rooms” rule. A photographer using studio lighting may consume more electricity than somebody doing bookkeeping at a desk once a week. Equally, a room used as an office for eight hours and as a family room for the rest of the day is not wholly business use.

A simple comparison example

Imagine a sole trader works at home for 60 hours in each of 12 months. Simplified expenses would produce £18 × 12, or £216, before separately considering qualifying telephone and internet use.

Under actual costs, suppose the relevant annual household costs are £7,200. If a reasonable analysis supports a 5% business proportion, the claim would be £360. That does not mean actual costs “wins” by £144. The calculation must first be technically appropriate and supported by evidence, and the extra record keeping has a cost of its own.

The numbers are illustrative only. Mortgage capital repayments are not the same as mortgage interest, private use must be excluded and some property costs raise wider considerations.

Five common mistakes

Claiming an arbitrary percentage

“Ten per cent feels fair” is not a method. Keep a short note explaining rooms, hours and cost categories. A calculation does not need to be theatrical, but another person should be able to follow it.

Treating every household bill alike

Some costs vary with use; others do not. Internet may already have been purchased for the household at the same price, but a more expensive business package may have an identifiable business element. Look at what the cost represents.

Forgetting private use

Mixed use must be reflected. This is particularly important for telephone calls, broadband packages and rooms serving more than one purpose.

Confusing sole traders with limited companies

A limited company cannot simply use the sole-trader simplified-expenses rules. The company and the individual are separate legal persons, and the appropriate route may involve reimbursed expenses, homeworking arrangements or other considerations.

Ignoring wider property consequences

Exclusive business use of part of a home can affect matters beyond the annual expense claim, including Capital Gains Tax treatment and potentially business rates or insurance. Mixed use and the facts matter. Obtain advice before designating part of a home exclusively for business.

Records worth keeping

For simplified expenses, retain a monthly record of hours worked at home and how the rate was selected. For actual costs, retain the bills, the annual calculation and the reasoning behind the allocation. Keep evidence for separately claimed telephone and internet costs.

Review the method when circumstances change: a house move, new office, higher energy use, a different working pattern or incorporation can all make last year’s calculation inappropriate.

A practical decision rule

Start by checking eligibility for simplified expenses. Then calculate both methods using supportable assumptions—not optimistic ones. Compare the tax difference with the time and uncertainty involved. A modest flat-rate claim may be entirely rational if the actual-cost benefit is small. Where home use is substantial, an evidenced actual-cost calculation may better reflect reality.

The strongest answer is rarely the largest number. It is the number that follows the rules, matches the facts and can still be explained two years later.

Further reading on The Perry

• Making Tax Digital for Income Tax in 2026: a practical first-year checklist
• Before you paste it into AI: a data-safety checklist for UK small businesses
• How to choose a password manager: a practical UK guide without a league table

Sources and further reading

• HMRC: Simplified expenses for working from home
• HMRC: Expenses if you’re self-employed
• HMRC: Simplified expenses checker
• HMRC Business Income Manual: use of home — specific expenses
• HMRC: Income and expenses under the cash basis

Source check: 23 August 2026. Verify current HMRC guidance before acting.

Featured image credit: Photo by Sasun Bughdaryan on Unsplash.

Making Tax Digital for Income Tax moved from a future change to a live obligation on 6 April 2026. For the first group of sole traders and landlords, bookkeeping software is now part of the route through Self Assessment rather than an optional convenience.

The basic idea sounds simple: keep digital records, send HMRC summaries during the year and complete the tax return through compatible software. The practical work sits underneath those words. A business needs to know whether it is in scope, which income counts towards the threshold, how each activity is represented in software and who is responsible for checking the final figures.

This article is general information, not individual tax or accounting advice. HMRC guidance changes, so follow the linked source material and check the position that applies to you before acting.

Who had to start in April 2026?

The first mandatory group consists broadly of individuals already within Self Assessment who receive income from self-employment or property and whose qualifying income for 2024–25 was more than £50,000.

“Qualifying income” is turnover before expenses, not taxable profit. It combines gross self-employment and property income. That distinction matters: a landlord or sole trader with modest profit can still cross the threshold because the test is based on income before costs.

HMRC’s published timetable then lowers the threshold in stages: more than £30,000 from April 2027, based on the 2025–26 return, and more than £20,000 from April 2028, based on the 2026–27 return. Partnerships and limited companies are not brought into this Income Tax regime merely because they use accounting software; the rules described here concern qualifying individuals.

The four moving parts

1. Digital records

Income and expense records must be created and stored in software that works with Making Tax Digital. The record normally needs the amount, date and category of each transaction. Digital record keeping does not remove the need to retain supporting material such as invoices and bank statements.

The sensible operational question is not simply “Do we own software?” It is “Where does each transaction first enter the system, and how is it checked?” Bank feeds reduce typing but do not decide whether an item is business, private, capital or revenue. Automation moves work; it does not remove judgement.

2. Quarterly updates

HMRC’s published standard deadlines for the first mandatory year are:

• first quarterly update: 7 August 2026;
• second quarterly update: 7 November 2026;
• third quarterly update: 7 February 2027; and
• fourth quarterly update: 7 May 2027.

These dates come directly from HMRC’s first-year MTD timetable. The updates are summaries of income and expenses from the digital records. They are not four miniature tax returns, but they still depend on records being complete enough to produce a meaningful submission.

HMRC has said it will not apply penalty points for late quarterly updates in 2026–27. That easement does not remove the obligation, and the updates must still be sent before the return can be completed.

3. Year-end review and the tax return

Quarterly submissions are not the end of the process. After the tax year, the records must be reviewed and adjusted. Other income and gains may need to be added, and reliefs or allowances considered. The taxpayer then submits the tax return through compatible software and pays by the normal 31 January deadline.

This is where professional judgement remains visible. A bank transaction may be recorded correctly as £600, yet still require a decision about business use, capital treatment, VAT or deductibility.

4. Responsibility

An agent can help configure software, review records and submit information, but the taxpayer remains responsible for complete and accurate information. Agree responsibilities explicitly: who records cash income, checks bank-feed matches, resolves queries, closes each quarter and approves submissions?

A practical first-year checklist

1. Confirm scope. Check the qualifying income on the relevant return and consider whether an exemption or other special rule may apply.
2. Choose compatible software. Test the whole journey, not just whether a product appears on a list. Consider multiple businesses, jointly owned property, bank feeds, corrections, agent access and the final return.
3. Separate business and private activity. A dedicated business bank account is not always legally required, but it can reduce classification work and mistakes.
4. Set an evidence routine. Decide how invoices, receipts and statements are captured, named, retained and linked to entries.
5. Clean opening data. Duplicate contacts, uncleared old items and inconsistent categories make automation less reliable.
6. Run a monthly review. Waiting until the quarterly deadline turns small uncertainties into a larger reconstruction exercise.
7. Document adjustments. Keep a short explanation and evidence for corrections or unusual treatment.
8. Plan for failure. Know who to contact if software, authorisation or a bank feed stops working near a deadline.

The useful way to think about MTD

Making Tax Digital is often presented as a filing change. In practice, it is a process-design change. The organisations likely to find it least disruptive are those that make record keeping routine, give exceptions to a real person to resolve and reserve enough time for review.

The goal should not be four perfectly polished management accounts. Nor should it be four hurried button presses. It should be a dependable flow of evidence into records, records into summaries and summaries into a properly reviewed annual return.

Further reading on The Perry

• Working from home when self-employed: simplified expenses or actual costs?
• Before you paste it into AI: a data-safety checklist for UK small businesses
• How to choose a password manager: a practical UK guide without a league table

Sources and further reading

• HMRC: Use Making Tax Digital for Income Tax — overview and first-year checklist
• HMRC: Making Tax Digital for Income Tax guidance collection
• HMRC: Creating digital records
• HMRC: Submitting the tax return through MTD software
• The Income Tax (Digital Obligations) Regulations 2026

Source check: 23 August 2026. Tax rules and HMRC guidance can change.

Featured image credit: Photo by Kelly Sikkema on Unsplash.