Home Office Deduction: What You Can Claim Under MTD ITSA Rules

Who This Applies To

If you're a freelancer or sole trader who works from home — even part of the time — you can claim a portion of your household running costs as a business expense. Under Making Tax Digital for Income Tax Self Assessment (MTD ITSA), which became mandatory for sole traders with income over £50,000 from April 2026, accurate record-keeping of these costs is more important than ever. Your quarterly updates to HMRC must reflect genuine, well-documented expenses.

Two Methods to Choose From

HMRC gives sole traders two ways to calculate their home office deduction. You must pick one method per tax year and apply it consistently.

• Flat Rate (Simplified Expenses): HMRC sets fixed monthly amounts based on the hours you work from home. For 25–50 hours per month, you can claim £10. For 51–100 hours, £18. For 101 hours or more, £26. This method requires no detailed records of actual bills — just your working hours.
• Actual Cost Method: You calculate the business proportion of your real household expenses. This takes more work but often produces a larger deduction, especially if you have high utility bills or a dedicated home office space.

How to Calculate the Actual Cost Method

To use the actual cost method, follow these steps:

• Step 1 — Identify eligible expenses: These include mortgage interest (not repayment), rent, council tax, heating, electricity, broadband, and home insurance. Mortgage capital repayments and general home improvements do not qualify.
• Step 2 — Count your rooms: Divide 1 by the total number of rooms in your home (excluding bathrooms and hallways). For example, in a 5-room home, each room represents 20% of the property.
• Step 3 — Calculate time used for business: Estimate what proportion of the day that room is used exclusively or primarily for business. If you use your home office 8 hours a day, 5 days a week, that's roughly 33% of the time (8 out of 24 hours).
• Step 4 — Multiply it out: Combine your room proportion and time proportion. Using the example above: 20% (room) × 33% (time) = 6.6% of total household bills you can claim.

On annual household costs of £15,000, that's a £990 deduction — significantly more than the flat rate would typically allow.

Exclusive vs Occasional Use

Be careful: if a room is used exclusively for business (a dedicated office with no personal use), you may claim a higher proportion — but this could trigger a Capital Gains Tax liability when you sell your home, as that room loses its private residence relief. Most advisers recommend occasional dual-use to avoid this risk.

MTD ITSA Record-Keeping Requirements

Under MTD ITSA, you must maintain digital records of all business income and expenses using compatible software. For home office costs, this means keeping:

• Copies of utility bills, council tax statements, and mortgage/rent agreements
• A log of your working hours if using the flat rate method
• A clear calculation showing how you arrived at your business proportion

These records must be retained for at least five years after the 31 January submission deadline for the relevant tax year. Your quarterly updates don't require you to submit receipts, but HMRC can request them during a compliance check.

Which Method Is Right for You?

The flat rate is ideal if your home costs are low or you want simplicity with minimal admin. The actual cost method is worth the extra effort if you pay high rent or bills, or if you work from home full-time. Run both calculations at the start of each tax year to see which gives you the better outcome — and record your reasoning in case HMRC ever asks.

If you're unsure, use EasyTax's built-in expense calculator to compare both methods against your real figures before your next quarterly update is due.