Working as a sole trader in the UK offers many advantages: autonomy, flexibility, and the ability to manage your own finances. However, it also means being responsible for accurately recording and claiming business expenses. One category that often causes confusion is utility expenses — costs that can include electricity, gas, broadband, water, and telephone services. While some of these are clearly business-related, others may be mixed with personal use, particularly if you run your business from home.
This comprehensive guide to understanding utility expenses for sole traders. It breaks down what expenses qualify, how to handle mixed-use scenarios, and the rules defined by HMRC for making legitimate claims. Getting this right is crucial, as it affects your tax calculations and ensures compliance with UK tax regulations.
Understanding Allowable Expenses for Sole Traders
Allowable expenses are defined by HMRC as costs that are incurred wholly and exclusively for the purposes of your business. These expenses can be deducted from your total income to calculate the taxable profit for the year. Reducing taxable profit through legitimate deductions can significantly lower your income tax and National Insurance contributions.
Utility expenses are one of several cost categories that may qualify, depending on how they are used. While expenses incurred in dedicated commercial premises are generally more straightforward, home-based businesses need to apportion usage to distinguish between business and personal use.
The Wholly and Exclusively Rule
The fundamental rule applied by HMRC to judge whether an expense is allowable is that it must be incurred wholly and exclusively for the purposes of the trade. This means the sole intention behind incurring the expense must be to support the business, and not for any personal benefit.
Where an expense is shared between business and personal use, such as a home electricity or broadband bill, you are permitted to claim only the business-related portion. For example, if you use a room in your house as an office and that room consumes electricity while you work, a percentage of the electricity bill can be claimed. But the portion relating to heating other parts of the house, watching TV, or cooking cannot be included.
HMRC does not provide a universal formula for these calculations. Instead, they require a reasonable, logical method that accurately reflects business use.
Claiming Utilities from Commercial Premises
If you rent or own commercial property that is used solely for business purposes, claiming utility costs is much more straightforward. All electricity, gas, water, internet, and phone services used on the premises can be fully claimed as allowable expenses, provided the services are exclusively for business purposes.
You will need to keep bills and records to support your claim. Payments should ideally be made through a dedicated business bank account to make your bookkeeping cleaner and more transparent. This method avoids the need for apportionment, which is otherwise required in home-based business setups.
Claiming Utilities When Working from Home
A large number of sole traders operate their business from home. This might involve working from a home office, a workshop in the garage, or a dedicated corner of a living room. When this is the case, you must apportion costs between personal and business use.
The most commonly claimed household utility expenses include:
- Electricity
- Gas
- Water (if eligible)
- Broadband
- Telephone
You must use a justifiable method to calculate the business-use proportion of these costs. One common approach is to calculate the number of rooms in your home and the amount of time each is used for business purposes.
For example, if you have a five-room house and use one room as an office for eight hours a day, five days a week, you would divide your total utility bill by five and then by three (to reflect one-third of the day). This gives you the portion of the utility bill you can claim as a business expense.
This method must be consistent and based on actual usage. You should keep notes or documentation to support your rationale in case HMRC questions your calculation during an audit or inquiry.
Choosing Between Actual Costs and Simplified Expenses
To help reduce the administrative burden, HMRC offers a flat-rate method known as simplified expenses. This method is available for sole traders who work from home for 25 hours or more per month. Rather than working out the exact business proportion of household bills, you can claim a fixed monthly amount based on your hours worked from home.
The simplified expense rates are as follows:
- £10 per month for 25 to 50 hours of work
- £18 per month for 51 to 100 hours of work
- £26 per month for over 100 hours of work
This method covers general household running costs, including heating, electricity, and some broadband use. It does not include telephone or broadband costs that are directly attributable to your business. These must be calculated separately using a reasonable method based on actual use.
Many sole traders choose simplified expenses because of the ease of administration. However, in some cases, claiming actual costs may result in a higher deduction, particularly if you incur high utility bills due to your business operations.
Water Bills: When They Can Be Claimed
Water is a utility cost that can cause confusion among sole traders. According to HMRC guidelines, you cannot generally claim domestic water rates as a business expense. The reasoning is that water bills for a home property would be incurred whether you ran a business from home or not.
However, there is an exception to this rule. If your business involves an activity that uses more water than usual, you may be able to claim a proportion of the cost. This applies to businesses such as:
- Dog grooming
- Hairdressing
- Car washing services
- Catering or baking services run from home
In such cases, the increased water use is directly linked to the nature of the business, and a reasonable proportion of the water bill may be claimed as an allowable expense. You must be able to demonstrate the additional use, and once again, it is advisable to keep clear records of how you arrived at your calculations.
You should not claim for higher water usage simply because you are at home more often or working from home. Unless the business specifically requires more water usage, such claims may not be accepted by HMRC.
Internet and Telephone Expenses
Most sole traders rely heavily on internet and phone services, whether it’s for managing a website, sending emails, making client calls, or operating software tools. These services often fall under mixed-use, as they are commonly shared with other members of the household or used for personal reasons.
To claim a proportion of your broadband or telephone costs, you need to estimate how much time and usage is devoted to your business. This might involve tracking:
- Hours spent online for business purposes
- Data usage for business vs. personal use
- Number of business-related calls made
Let’s say your broadband bill is £40 per month and you estimate that 60 percent of your online activity is business-related. You can then claim £24 as an allowable business expense each month. Over a year, that equates to £288.
Similarly, if you have a mobile phone or landline used for both business and personal purposes, only the business-use portion is claimable. If you have a separate phone line or broadband installed exclusively for business in a commercial premises, then 100 percent of the cost is generally allowable, provided there is no personal use and the premises are not part of your residence.
You are encouraged to keep itemised bills, data logs, or estimates that support your claim. If HMRC challenges your expenses, you will need to show how you arrived at the figures and why they are reasonable.
Practical Examples of Utility Expense Apportionment
Let’s explore a few practical examples to see how sole traders might calculate and record utility expenses:
Example 1: Web Developer Working from a Home Office
A sole trader works in a dedicated office room in a six-room house. They work eight hours a day, five days a week, using electricity for their computer and heating during the winter.
- Electricity bill: £180 per month
- One room used, eight hours per day (one-third of the time)
- £180 ÷ 6 rooms = £30
- £30 ÷ 3 (time used) = £10
The developer can reasonably claim £10 per month for electricity, totalling £120 over the year.
Example 2: Mobile Hairdresser Using Home for Bookings and Storage
A mobile hairdresser uses a room in their home for managing bookings and storing supplies. They also run a tap to clean tools and wash towels.
- Water bill: £400 per year
- Business-related use estimated at 15 percent
- £400 x 0.15 = £60
In this case, £60 of the water bill may be claimed, provided the business use can be justified.
Example 3: Artist Renting a Commercial Studio
An artist rents a commercial studio space that includes electricity and broadband. They live separately and do not use the studio for personal reasons.
- Electricity: £600 per year
- Broadband: £300 per year
- Full amount claimable: £900 total
There is no need for apportionment as the studio is exclusively for business use.
Why Tracking and Record-Keeping Matters
All sole traders are legally required to keep financial records of their income and expenses. HMRC expects you to retain these for at least five years after the 31 January submission deadline for the relevant tax year. These records support the information submitted on your tax return and prove the accuracy of any claims, including those for utility expenses.
Failing to maintain adequate records may result in HMRC disallowing your expense claims, issuing penalties, or triggering an investigation. Therefore, developing good habits around record-keeping is essential, especially when you regularly incur utility costs that must be apportioned.
Setting Up a System for Utility Expense Tracking
The best way to ensure accuracy and reduce errors is by creating a consistent method for recording your expenses. This doesn’t have to involve complex accounting software, although digital tools can help. A simple spreadsheet or even a notebook is acceptable, provided the data is complete and easy to follow.
Start by creating categories for each utility you pay for, such as:
- Electricity
- Gas
- Water
- Internet
- Telephone
Under each category, log every monthly bill or payment. Include the date, amount paid, supplier, and how the expense is apportioned between business and personal use. For instance, if you determine that 25 percent of your electricity use relates to your business, your record should note the calculation and justification.
Consistency in the way you apply your apportionment is vital. HMRC looks for patterns and reasonableness. Once you choose a method, it’s advisable to stick with it unless circumstances change.
Tracking Utility Use in Shared Living Spaces
If you work from home or share utilities with others, it can be difficult to separate your business usage. This is particularly true for internet and phone use, where multiple people in the household may contribute to consumption.
In such situations, consider these methods to create a fair estimate:
- Room-based apportionment: Divide the total cost by the number of rooms in your home, then apply the percentage based on how long the business-related room is used daily or weekly.
- Time-based tracking: Track the number of hours you use a utility for business compared to total hours of household usage.
- Data or call usage logs: Use your broadband or mobile provider’s statements to estimate what percentage of the service was used for business.
Let’s say you use your living room as a home office five days a week for eight hours. If your home has four rooms and you work one-third of the day in that space, you’d divide your utility bill first by four and then by three. That result would be your allowable expense portion for that specific utility.
Creating a Monthly Utility Log
Maintaining a monthly log is one of the most effective ways to manage your business utility costs. Your log should include:
- The date the utility bill was issued
- The billing period covered
- The total amount paid
- The method of payment (bank transfer, direct debit, credit card)
- The percentage attributable to business use
- The calculated amount you plan to claim
Receipts and Documentation
Although HMRC does not require you to submit receipts or bills when filing your Self Assessment return, they do expect you to retain evidence in case of review. You should keep the following:
- Monthly utility bills from providers
- Payment confirmation (e.g. bank statements or payment receipts)
- Calculations showing how you apportioned mixed-use utilities
- Any correspondence or contracts with utility companies
Digitally storing your bills in cloud folders or a secure drive ensures you always have access and can avoid losing paperwork. You can scan paper copies or download PDFs directly from your provider’s website.
Using Utility Meters to Monitor Usage
Some homes and business properties are equipped with smart meters or separate meters for specific areas or devices. These can be invaluable in establishing accurate business use.
For example, if your home office has its own meter or circuit, you can determine exactly how much electricity is being consumed during working hours. If you don’t have a separate meter, a plug-in energy monitor can help estimate the consumption of specific devices like computers, printers, and lighting.
Likewise, for water usage, a separate tap or dedicated cleaning area for your business (such as a dog grooming basin or catering prep station) makes it easier to demonstrate increased business-related usage.
Claiming for Mobile Phone and Broadband Use
Telephone and internet use are often overlooked or inaccurately claimed due to the difficulty in separating business from personal use. However, these expenses can represent a significant portion of your operational costs, especially if your business relies heavily on online communication or customer service.
To make a legitimate claim:
- Review your itemised phone bill. Identify and total the number of business-related calls.
- Estimate the data usage for business activities such as video conferencing, uploading files, or managing online sales.
- Keep a log or journal that shows business usage patterns over time.
If you use a dedicated mobile phone for business and do not use it personally, you can usually claim the full cost. If you use one phone for both, determine a reasonable split, such as 60 percent business and 40 percent personal, based on your usage.
For broadband, time-based tracking is often the best approach. For instance, if you are online for business 40 hours a week and use the internet for 20 hours for personal activities, a 66 percent business usage claim would be reasonable.
Tips for Managing Utility Expenses Throughout the Year
To avoid the last-minute rush during tax season, here are a few habits to develop:
- Log expenses monthly: Set aside time each month to enter your utility expenses into your records.
- Review and adjust apportionments: If your working hours or usage patterns change, update your estimates accordingly.
- Separate business and personal use where possible: Consider getting a separate phone line or broadband connection for business.
- Use cloud-based accounting tools: While not essential, accounting apps can automate much of the data entry and categorisation.
The more consistently you manage your records, the less likely you are to miss allowable expenses or trigger scrutiny from HMRC.
Choosing Between Cash Basis and Traditional Accounting
When you complete your Self Assessment tax return, you can choose between cash basis and traditional accounting methods.
- Under the cash basis, you record income and expenses when money actually enters or leaves your account. This is simpler and widely used by sole traders with straightforward finances.
- Traditional accounting (accrual basis) records income and expenses when they are earned or incurred, regardless of when the money changes hands. This method is more complex but may be necessary if your business has inventory or a turnover above the cash basis threshold.
Whichever method you choose, your utility expenses should be recorded consistently. For a cash basis, log the payment date and amount. For traditional accounting, log the expense according to the date on the bill or invoice.
Apportioning Utility Bills Over the Tax Year
To claim utility expenses on your tax return, you must total your allowable business expenses for the entire tax year (6 April to 5 April). You’ll need to apply your apportionment calculation to each monthly bill and then add up the business-related amounts.
For example, if your electricity bill was £150 per month and you claim 25 percent for business use, that’s £37.50 per month, or £450 annually. Repeat this for each utility category.
At the end of the tax year, you’ll input the total allowable expenses in the relevant section of your Self Assessment form. While you do not need to provide itemised breakdowns in the return itself, the figures must be accurate and backed by your internal records.
Preparing for HMRC Checks or Inquiries
Though not every sole trader is audited, HMRC does conduct periodic checks to ensure compliance. You may be selected at random or because something on your return triggered a red flag. In either case, you’ll need to demonstrate how you calculated your business expenses.
This means showing:
- Copies of utility bills and payment confirmations
- Written explanations of apportionment logic
- Time logs, energy use records, or supporting calculations
- Evidence of business activity in the home (such as photos of your work area or correspondence with clients)
Being able to quickly produce clear, logical documentation will make the process smoother and reduce the risk of penalties or adjustments.
Optimising Claims and Avoiding Common Pitfalls
Managing utility expenses as a sole trader is about more than identifying what can be claimed and how to track it. In practice, sole traders often overclaim or underclaim because they misunderstand the rules or apply them inconsistently. To maximise the value of your claims while remaining fully compliant with HMRC guidelines, it’s important to apply sound strategies, understand the risks of common mistakes, and make informed decisions about whether to claim actual costs or opt for simplified expenses.
We focus on how to optimize your allowable utility expense claims while staying within legal and ethical boundaries. It also explores practical examples, compares simplified expenses with actual cost calculations, and identifies red flags that could increase the likelihood of HMRC scrutiny.
Choosing Between Simplified Expenses and Actual Costs
One of the main decisions faced by sole traders working from home is whether to use simplified expenses or calculate exact business-use percentages for each utility.
Simplified expenses allow you to claim a flat monthly amount for working from home, based on the number of hours worked per month. The rates are:
- £10 per month for 25 to 50 hours
- £18 per month for 51 to 100 hours
- £26 per month for 101 hours or more
This method is easy to apply, requires minimal record-keeping, and suits sole traders with light utility usage or small working areas. However, simplified expenses do not include phone and internet costs, which must still be claimed separately.
If your utility costs are high or you use a significant portion of your home for business, claiming actual costs may offer a better return. However, it involves more effort in tracking, calculating, and documenting usage, which increases the burden of compliance.
Weighing the Pros and Cons
To decide between simplified expenses and actual costs, consider the following:
- Home size and usage: If you dedicate a full room to your business and work long hours, actual cost calculation might yield a higher deductible amount.
- Utility bill size: Larger households often have higher utility bills. If a fair proportion relates to business use, the actual cost method will reflect the true expense.
- Administrative burden: Simplified expenses save time and reduce paperwork, making them ideal for smaller operations.
- Audit preparedness: Claiming actual costs requires supporting calculations. If audited, you must show your reasoning and backup documentation.
Run a side-by-side comparison for a full tax year to see which method delivers the higher tax-saving benefit.
Common Mistakes Sole Traders Make
Even with good intentions, it’s easy to make errors when claiming utility expenses. Being aware of common pitfalls helps reduce the chance of over- or under-reporting.
Overestimating Business Use
One of the most frequent mistakes is inflating the proportion of utility costs used for business. Claiming that 70 or 80 percent of electricity or broadband is for business purposes may raise red flags, especially if you live with others or have dependents.
A more realistic range for home-based businesses is often between 10 to 40 percent. Unless your business operates independently of your household (such as in an annex or converted garage), high claims require detailed justification.
Applying a Flat Percentage to All Utilities
Another error is applying the same business-use percentage across all utilities. This often happens when someone determines a 25 percent work use figure and applies it to water, gas, broadband, and electricity without considering how each utility is used.
For example, the internet may be used 80 percent for business while gas heating might only be 20 percent related to your working hours. Each utility should be assessed on its own, based on actual consumption patterns.
Failing to Update Calculations When Circumstances Change
Your business routine may change during the year. You might expand into an additional room, switch to part-time work, or move house. Continuing to use outdated apportionment calculations can lead to inaccurate claims.
It’s important to review your estimates at least once every quarter and whenever a significant change occurs. Keep written notes in your records about any adjustments and the reasons behind them.
Forgetting to Include Utility Costs Paid Annually
Some sole traders overlook expenses paid once per year, such as annual broadband contracts, boiler servicing, or water bills. If you pay these upfront, they still count toward the current tax year and can be partially claimed for business use.
Review all payment methods and accounts to ensure you haven’t missed annual charges that are deductible.
Practical Examples of Business Use Calculations
To illustrate how to optimise your claims, consider the following examples.
Example 1: Home-Based Graphic Designer
- Lives in a 6-room house
- Uses one room exclusively as a home office
- Works 8 hours a day, 5 days a week
- Electricity bill: £1,200 per year
- Broadband and phone: £600 per year
Calculation:
- Room-based allocation: 1/6 = 16.7 percent
- Time-based allocation: 8 hours / 24 hours = 33.3 percent
- Total business-use proportion: 16.7 percent × 33.3 percent = 5.6 percent
- Allowable electricity expense: £1,200 × 5.6 percent = £67.20
- Broadband usage: 75 percent for business = £600 × 75 percent = £450
- Total claim: £67.20 (electricity) + £450 (broadband) = £517.20
This claim is likely to be seen as reasonable by HMRC, especially with logs and calculations kept on file.
Example 2: Dog Groomer Operating from Home
- Uses one room plus garden area
- Heavy use of water and electricity
- Works 6 days a week, 10 hours per day
- Water bill: £500 annually
- Electricity bill: £900 annually
Calculation:
- Based on usage intensity, estimates 40 percent of water is for business
- Electricity: estimates 30 percent due to dryers and equipment
- Water claim: £500 × 40 percent = £200
- Electricity claim: £900 × 30 percent = £270
- Total claim: £470
This claim involves above-average utility usage but is justifiable due to the nature of the work. Supporting evidence should include schedules, client appointments, and images of the grooming setup.
Avoiding Triggers That Attract HMRC Attention
HMRC uses algorithms and risk indicators to flag suspicious tax returns. While claiming utility expenses is entirely legitimate, certain patterns or behaviors may increase the chance of your return being selected for review.
- Unusually high expense ratios: If your expenses are a large percentage of your income, HMRC may question how your business remains viable.
- Round number claims: If you enter round figures like £100 or £500 without exact calculation, it may suggest estimation rather than record-based reporting.
- Inconsistent claims across tax years: Significant changes in claimed amounts without corresponding changes in business activity may lead to scrutiny.
- Claiming expenses with no visible business activity: If you report minimal income but claim utility and other expenses, HMRC may question the legitimacy of your trading status.
To reduce risk, always base your claims on actual usage and maintain clear, dated documentation. If you’re ever unsure about a claim, it’s safer to err on the conservative side or consult a professional.
Planning for Growth: When to Adjust Your Utility Claiming Strategy
As your business grows, you may outgrow your current workspace. You might rent a studio, convert a garage, or lease commercial premises. These developments can impact how you claim for utilities.
- In a dedicated studio at home, you may be able to increase your claim, as the room is no longer shared or dual-purpose.
- If you rent commercial premises and pay for utilities separately, you can typically claim 100 percent of those costs as business expenses.
- If you start using staff or sharing your home office with other business users, your calculation methods should be adjusted to reflect the increased intensity and time of use.
It’s also important to note that converting part of your home into a full-time business space may affect Capital Gains Tax when you sell the property. Always weigh the long-term implications when adapting your home for business purposes.
Organising Your Year-End Utility Expense Report
When preparing to file your Self Assessment tax return, it helps to assemble a dedicated utility expense report. This can be a spreadsheet, printout, or part of your accounting software.
Your report should include:
- A month-by-month breakdown of each utility
- Total paid for each category
- Applied percentage for business use
- Total allowable expense
- Notes about how each percentage was determined
This document will make the tax return process faster and act as your first line of defence in case of an HMRC inquiry.
When to Seek Professional Support
While many sole traders manage their taxes independently, there are times when consulting an accountant or tax adviser is advisable:
- Your home use or business structure becomes more complex
- You’re unsure whether your apportionment methods are accurate
- You’ve received a letter from HMRC requesting more information
- You want to ensure your claims are optimised without risk of penalties
A professional can also help you reassess your tax strategy annually and recommend adjustments to stay efficient as your business evolves.
Conclusion
Navigating the rules around claiming utility expenses as a sole trader may seem complex at first, but understanding the core principles can significantly reduce your tax liability while keeping you compliant with HMRC regulations. Across this series, we’ve explored the fundamental criteria for allowable expenses, how to claim when working from home or from commercial premises, and how to choose between simplified expenses and actual cost methods.
The key takeaway is that utility expenses must always be claimed on a reasonable and justifiable basis. Whether you’re calculating the business-use portion of your electricity or estimating broadband usage for work, your approach must reflect actual usage patterns. Simplified expenses offer an efficient route for some, but they may not be the most tax-effective for businesses with higher utility usage or dedicated workspaces at home.
We’ve also highlighted the importance of detailed record-keeping. From bills and receipts to time-use logs and room breakdowns, accurate documentation supports your claims and safeguards against HMRC penalties. Common mistakes like overestimating business use, applying generic percentages across all utilities, or failing to adjust calculations when circumstances change can all lead to rejected claims or fines.
As your business grows or evolves, so too should your approach to claiming expenses. Regularly reviewing your usage, updating your methods, and, if necessary, seeking professional advice will help you maximise your deductions responsibly. Ultimately, a proactive and informed strategy ensures that your utility claims contribute to the financial efficiency of your sole trader business without exposing you to unnecessary risk.
By applying these principles, you not only reduce your tax burden but also build a more structured and sustainable business. Let your expense claims reflect the professionalism of your trade and use them as tools to support long-term success.