Why home-office costs matter for a PSC contractor
Most limited company contractors work partly or wholly from home, particularly between client sites or during the between-contracts gaps that are a normal feature of the contracting career. The costs of that home working are real: extra electricity, heating, broadband, a dedicated workspace. Whether and how those costs flow through the PSC as a deductible expense depends on two things: whether the spending genuinely meets the wholly-and-exclusively test, and whether the mechanics of the payment are set up correctly.
Getting this right matters for two reasons. First, a valid home-office claim is a straightforward, low-risk corporation tax deduction that costs nothing extra to implement once the paperwork is in order. Second, a poorly structured or undocumented claim is one of the easier targets for an HMRC enquiry: the sums are often modest enough that the yield from a challenge does not deter HMRC, but the recharacterisation of an undocumented payment as salary or a benefit in kind can be disproportionately disruptive.
For a full map of what a PSC can and cannot claim across the whole expenses picture, including travel, equipment, professional subscriptions and trivial benefits, see the contractor expenses allowable guide. This page focuses specifically on the home-office piece.
The wholly-and-exclusively test: the foundation of every claim
Every expense a PSC claims must pass the wholly-and-exclusively test. For the company, this comes from the general business-expense rule (ITTOIA 2005 s.34 as applied to corporate profits via the Corporation Tax Act): expenditure is only deductible if it is incurred wholly and exclusively for the purposes of the trade. "Exclusively" is strict: spending that has a dual purpose, business and personal, is not deductible unless the business element is genuinely identifiable and separable from the personal element.
In the context of a home office, this creates a practical question: is the space and the expenditure on it clearly allocated to business use, or is it a mixed-use room where personal life and contracting overlap? The answer shapes how much (if anything) can be claimed and by which method.
Dedicated rooms versus shared spaces
A room used exclusively and genuinely for business during working hours, with no concurrent personal use, is the cleanest position. A spare bedroom converted to a full-time home office, with a desk, equipment and a door that the family does not use during the working day, would normally satisfy the wholly-and-exclusively test for the proportion of household costs attributable to that room. The business use is real, regular and separable.
A dining table in the kitchen, or a corner of the living room, is harder. The space has simultaneous personal and business availability, so the dual-purpose problem is live. HMRC and the courts have consistently held that where expenditure is genuinely dual-purpose and the purposes are inseparable, the whole amount fails the test, not just the personal share. However, where the business use is real and the personal element is incidental (a chair that happens to be sat in for both personal evenings and work calls), a reasonable apportionment can still be made in practice, subject to documentation.
The practical rule: document the space, its use and the hours worked there. Do not assume the claim is self-evidently reasonable; show the workings.
Two methods for calculating the allowable amount
Once it is established that some level of home-office deduction is justified, the question is how to calculate the figure. There are two broad approaches: the flat-rate method and the actual-cost apportionment method.
The flat-rate approach
HMRC publishes simplified flat rates for working from home, primarily designed for sole traders using simplified expenses. These provide a fixed weekly amount based on the number of hours worked at home per month (at current published HMRC figures for employees, a modest weekly rate applies). For employees, there is a separate flat rate under ITEPA s.316A that employers can pay tax-free.
For a PSC director, the flat rates are a reference point rather than a defined entitlement. The employer reimbursement flat rate under ITEPA s.316A is £6 per week (£26 per month, per EIM01476) for 2026/27. For self-employed individuals using simplified expenses, HMRC publishes three bands based on hours worked at home per month: 25 to 50 hours: £10/month, 51 to 100 hours: £18/month, and 101 or more hours: £26/month. A PSC is not obliged to use these rates, and for most contractors who work from home for a significant portion of their hours, the actual-cost apportionment method will produce a materially larger deduction. The value of the flat-rate approach is its administrative simplicity: the figure is modest, the calculation is trivial, and it presents very low enquiry risk.
If the simplicity of a flat rate appeals, the documented approach is: pass a director resolution recording that the PSC will reimburse the director at the published HMRC working-from-home rate for weeks in which the director works from home, and retain a record of those weeks. The payment is then a reimbursement of genuine additional costs on a clearly documented basis.
The actual-cost apportionment method
Contractors who work from home full-time or for a substantial proportion of their hours will find the actual-cost approach typically produces a materially larger deduction and is worth the additional record-keeping. The starting point is the contractor's annual household running costs that have a business element:
- Heating and electricity (gas and power bills)
- Broadband (if shared between personal and business use)
- Rent or, for homeowners, the interest element of a mortgage (not capital repayment)
- Home insurance (to the extent it covers business use; check the policy, since some exclude business use)
The business proportion of these costs is then calculated by reference to two variables: the proportion of the home used for work (number of rooms used for business as a fraction of total rooms, typically excluding bathrooms and hallways) and the proportion of time the relevant space is used for business (business hours as a fraction of total hours in the day or week).
A common worked structure: a contractor with a six-room home (four usable rooms counted) who uses one room exclusively for business during a standard working week. That room is one quarter of the usable floor space. Business hours over the week might be 35 to 40 hours out of 168 hours total. Combining the space fraction and the hours fraction gives the business proportion of overall running costs. The calculation must be documented and the underlying bills retained.
Note that "mortgage interest" is often referenced in this context, but for a homeowner using the apportionment method the deductible element is typically limited to the additional costs of running the property, not a proportion of the capital repayment component of the mortgage. The interest element represents a cost of the space; capital repayment is a form of saving or investment and is not an additional running cost. Seek specific advice if your mortgage costs form a significant part of the claim.
Council tax is excluded from the employee or director additional-cost calculation (EIM32815: excluded since 2006/07). It is not an allowable additional cost for reimbursement to a director or employee working from home. Council tax can potentially be relevant only to a deduction by the company itself under the exclusive-use rules at BIM47820, which apply a different and stricter test; take specialist advice before pursuing that route.
From 6 April 2026, the employee's own unreimbursed deduction route (under which a director could claim a home-office deduction personally on their self-assessment return under EIM32759) closed. The PSC employer-reimbursement route described on this page is therefore the operative route for PSC directors from that date.
The PSC payment mechanism: how the money actually flows
There are two main routes by which a PSC pays for the director's home-office costs. The right route depends on the scale of the arrangement and whether the director owns or rents the property.
Reimbursement of additional costs
The simpler route: the director incurs the household costs personally (they pay the electricity bill, the broadband, the council tax), and the PSC reimburses the director for the business proportion. The PSC claims a deduction for the reimbursement. The director does not pay income tax on the reimbursement because it is a genuine reimbursement of business expenditure, not remuneration.
For this to work, three things must be in place before any payment is made. First, a director resolution or board minute authorising the arrangement and recording the basis on which the business proportion is calculated. Second, a documented calculation showing how the figure was reached. Third, retention of the underlying bills and a record of the period of business use. Paying the reimbursement monthly (with monthly records) is cleaner than a single year-end payment unsupported by contemporaneous records.
Formal licence or rental arrangement
An alternative, which produces slightly different tax treatment, is a formal written licence or rental agreement between the director (as the homeowner or tenant) and the PSC, under which the PSC pays a licence fee for the right to use part of the director's home as office space. The PSC deducts the licence fee. The director reports the licence fee as rental income on their self-assessment return.
The rental income is taxed as property income, not employment income, so it does not attract NIC. However, it also does not benefit from the dividend rate; it is taxed at the director's marginal income tax rate. The director can deduct allowable expenses against the rental income (typically a share of the costs attributable to the let space, mirroring the apportionment calculation above), which reduces the net taxable amount.
This route adds complexity (a separate self-assessment rental income entry, a written agreement, potentially a question about whether the arrangement affects the home's council-tax or planning use) and is usually worthwhile only where the sums involved are material enough to justify the administration. For smaller claims, the reimbursement route is simpler.
CGT and private residence relief: the boundary to watch
Any arrangement that could characterise part of the home as a commercial letting, particularly if that part is used exclusively for business and not also available for personal use, carries a risk of partial loss of private residence relief for capital gains tax purposes. Where a room is used exclusively for business (never for any personal purpose), HMRC may take the view that the portion of the gain attributable to that room is chargeable to CGT on disposal of the property.
In practice, most home-working claims are deliberately structured to avoid this outcome: the room is used for work during the working day but is not exclusively dedicated to business use in the strict sense (it can be, and sometimes is, used for other purposes). The apportionment is then made on a time basis rather than a dedicated-space basis, which avoids triggering the private residence relief restriction. If you are considering a more formal licence arrangement with the PSC, take advice on the CGT implications before signing.
Phone and broadband: the business-proportion rule
Two costs that are particularly relevant for contractors working from home are phone and broadband. The rules here are relatively straightforward.
Where the PSC provides a mobile phone to the director and pays for the contract (one mobile phone per director/employee), the full cost is deductible by the PSC and the director pays no income tax or NIC on the benefit, even if there is some personal use. This is the mobile-phone benefit-in-kind exemption under ITEPA 2003 s.319. It applies to one phone per employee; a second handset provided by the company to the same person is taxable as a benefit in kind.
Broadband is different. There is no blanket exemption for home broadband in the way there is for mobile phones. Where the director personally pays for a broadband connection used for both work and personal purposes, the business proportion can be reimbursed by the PSC and deducted. Where the PSC pays for a dedicated business broadband line (or a separate line for work use), the full cost is deductible and there is no benefit in kind because there is no personal use. Where a single line serves both, the proportioning approach applies: document the business-use proportion and retain the bills.
Equipment, furniture and capital allowances
A desk, chair, monitor, printer and other equipment used for business at home are allowable capital expenditure for the PSC. In most cases, the full cost of individual items can be written off immediately under the annual investment allowance (AIA), which provides 100% relief on qualifying plant and machinery expenditure up to very high limits. For a typical contractor, the cost of a desk and a monitor will be well within the AIA.
The position changes if equipment is used for both personal and business purposes. A television in a home office that is also used for personal entertainment is not straightforwardly a business asset. A high-specification monitor used primarily for development or design work but also for personal browsing sits in a grey area. The practical approach is to document that the equipment was acquired for business use, is primarily used for business, and any personal use is incidental rather than a core purpose.
From a corporation-tax perspective, the PSC owns the equipment it purchases. This is an important distinction from the reimbursement route for running costs: the PSC buys the equipment and retains it as a company asset, rather than reimbursing the director for a personal purchase.
Inside IR35: how home-office claims are affected
The home-office discussion above assumes the contractor is operating outside IR35 or that the PSC is claiming against its own profits generally. Where an engagement is caught inside IR35, the position is materially different.
Under Chapter 10 (the off-payroll rules, where the client is medium or large and has issued an inside determination), the fee-payer operates PAYE and employer NIC on the income before paying the PSC, and the PSC has already-taxed income arriving. The employment-expense rules that restrict travel deductions for workers under supervision, direction or control through an intermediary (ITEPA ss.338A and 339A) apply in this context, and they apply equally to home-office costs: broadly, the test for a deemed employee is the stricter "necessarily incurred" employment test, not the business-purpose test that applies to the company's own trading expenses.
Under Chapter 8 (where the PSC self-assesses for a small or overseas client), the deemed employment payment calculation at year-end allows deduction of certain employment-type expenses, but these are assessed on an employment basis as well, and the scope is narrower than the PSC's general expenses.
The short version: if your engagement is inside IR35, the home-office claim shrinks significantly. If you have a mix of inside and outside engagements, your accountant will need to apportion correctly. The wave-1 travel expenses inside IR35 page covers the T&S restriction in more detail; the same underlying logic applies to home-office costs in the inside-IR35 context.
Common mistakes and how to avoid them
Home-office claims are a genuinely worthwhile area of tax planning for PSC contractors. They are also an area where straightforward mistakes are common. The most frequent ones:
Paying without a written agreement
A payment from the PSC to the director that is not supported by a documented resolution and a calculation is a liability waiting to materialise. HMRC will ask what the payment was for; "use of home" without anything on file is not a satisfactory answer. The fix is simple: pass a director resolution, document the calculation, file it with the company records. Do this before the payment, not in retrospect.
Using an arbitrary round figure
A monthly payment of exactly £200 or £300, every month without variation, with no underlying calculation, looks like a salary supplement dressed as a home-office allowance. The amount must be derived from an actual calculation of business-use proportion of actual costs. If costs are relatively stable and the figure happens to be similar month to month, that is fine; the point is that there must be a methodology that produces the number, not a number chosen for convenience.
Conflating the director's personal claim with the PSC's claim
An employee-contractor might be entitled to claim a working-from-home allowance from HMRC directly under the employee flat-rate rules. A PSC director paying themselves through the company is in a different position: the claim route is through the company, not via the director's personal self-assessment return (except for the rental-income route, where the director declares rental income). Mixing the two routes creates confusion and potential double-counting.
Over-claiming the mortgage
The capital repayment portion of a mortgage is not an allowable expense in the home-office context. Only the interest element (and even then, only the business proportion of it) represents a cost of using the space. Claims that include a proportion of total mortgage repayments will include a capital element that is not allowable, producing an inflated and potentially challengeable figure.
Bringing it all together: a practical checklist
Before making a home-office claim through your PSC, work through these steps:
- Establish that genuine business use exists and is documentable. Note which room or space is used, for what activities and for roughly how many hours per week.
- Choose the calculation method: flat-rate (simple, modest) or actual-cost apportionment (more accurate, more documentation). For most contractors working from home for a significant portion of their time, actual-cost apportionment is worth the effort.
- Run the calculation before any payment is made. Document the rooms, the hours and the actual costs (with reference to the bills). Produce a written summary that someone outside the business could follow and verify.
- Pass a director resolution authorising the PSC to reimburse the director for home-office costs and recording the basis of calculation.
- Pay regularly and consistently, with records covering each payment period (monthly is cleanest).
- Retain the underlying bills (electricity, gas, broadband, council tax or rent) for at least six years.
- Review annually: household costs change (bills rise, the contractor may move), and the calculation should be updated each year.
- Consider the CGT position if you are considering a more formal rental arrangement, and take advice before proceeding.
For the wider context of what the PSC can and cannot claim, including the wholly-and-exclusively test applied to travel, professional subscriptions, equipment, trivial benefits and the 24-month temporary-workplace rule, the contractor expenses allowable guide is the place to start.
IR35 status and the expenses picture: why it matters
Every home-office claim exists in the context of the contractor's IR35 position. An outside-IR35 PSC operating cleanly has the most flexibility. A contractor with a mix of inside and outside engagements needs to track the income from each and apply the correct expense treatment to each stream. A contractor who is entirely inside IR35 will find that most of the detailed expense planning above does not apply in the way it does to an outside-IR35 operation.
Understanding your IR35 position is therefore a prerequisite for making sensible expense decisions. If you are unsure whether your engagements are correctly determined, our IR35 status review service covers both the contract and the working-practices assessment that together give a reliable picture.
Expenses are one tool in the overall tax-efficiency kit for a PSC contractor. They are not the main event: as the house-positions note and as the allowable expenses guide explains, the genuinely large lever for most contractors is not day-to-day expense claims but the employer pension contribution, which delivers corporation tax relief and no NIC on what is often the largest extractable amount. Getting the expenses right matters; keeping it in proportion matters equally.
If you would like to review the overall efficiency of your PSC structure, including salary, dividends, pension contributions and the expenses picture together, our contractor accountancy services cover the whole picture.