Mileage allowance or actual costs? Choosing for self-employed drivers

If you drive for your business, whether you are a plumber in a van, a mobile hairdresser, a courier or a private hire driver, your vehicle is probably one of your biggest costs. Sole traders have two ways to claim it: a flat rate per business mile, or the actual costs of running the vehicle. The right choice depends on the vehicle and how much you drive, and once you choose, you may be stuck with it. This guide explains both methods, the 2026 to 2027 rate change and the records each one needs.

Who can choose

Both methods are open to sole traders and partnerships with no company partners. HMRC's simplified expenses guidance says limited companies, and partnerships that include a company, cannot use simplified expenses. If you trade through a company, vehicle costs work differently and this guide does not apply.

Option 1: simplified expenses (flat mileage rates)

Instead of adding up what the vehicle costs, you multiply your business miles by a flat rate. HMRC's rates are:

The first-10,000-miles rate for cars and vans has gone up from 45p to 55p for the 2026 to 2027 tax year. HMRC's own example is 11,000 business miles: 10,000 × 55p = £5,500, plus 1,000 × 25p = £250, giving £5,750.

The flat rate replaces the costs of buying and running the vehicle: fuel, insurance, repairs, servicing and so on. HMRC says you can still claim parking and other travel such as train journeys on top.

Restrictions

• You can use simplified expenses for cars, goods vehicles such as vans, and motorcycles. HMRC excludes cars designed for commercial use, giving the examples of black cabs, hackney carriages and dual-control driving instructors' cars.
• You cannot use flat rates for a vehicle you have already claimed capital allowances on, or included as an expense when working out your profits.
• Once you use flat rates for a vehicle, you must keep using them for as long as you use that vehicle in the business. You can use different methods for different vehicles, but each vehicle is locked in once chosen.

Option 2: actual costs

You add up what the vehicle really costs and claim the business proportion. HMRC's list of allowable car, van and travel expenses includes:

• vehicle insurance
• repairs and servicing
• fuel
• parking
• hire charges
• vehicle tax and licence fees
• breakdown cover

The cost of buying the vehicle is not a running expense. It is usually claimed through capital allowances, which HMRC notes still apply to a car even if you use cash basis accounting.

If you use the vehicle privately as well, you can only claim the business share. You need a reasonable basis for that share, and your mileage records are normally it: if 6,000 of 15,000 miles were for business, you would usually claim 40% of the costs.

What you can never claim

Under either method, HMRC says you cannot claim:

• non-business driving or travel
• fines or penalty charges, including parking tickets
• travel between home and work

That last one needs care. Driving from home to a fixed workplace, such as your own shop or a long-term site, is commuting. Driving between customers, to a supplier or to temporary sites is business travel.

Which works out better?

There is no general answer. It depends on your vehicle and your miles, and HMRC offers a simplified expenses checker to compare the two. Some broad patterns:

• Flat rates often suit cheap-to-run, fuel-efficient cars, and people who want simple records.
• Actual costs often suit vehicles with high running costs, such as a large van with heavy insurance, or an expensive vehicle bought for the business where capital allowances are worth a lot.
• High mileage cuts both ways. The rate drops to 25p after 10,000 miles, but actual costs also grow with every mile.

Because of the lock-in rule, the decision you make in the first year with a vehicle is the one that matters. Work out both options and, if in doubt, ask an accountant before you file.

The records you need

For flat rates

You need a record of your business miles: dates, journeys or postcodes, purpose and miles. A diary, a spreadsheet or a mileage app all work, as long as it is kept as you go rather than rebuilt from memory in January. Keep parking receipts separately, because they are claimed on top.

For actual costs

You need every receipt and bill: fuel, insurance schedules, garage invoices, MOT, tyres, breakdown cover, vehicle tax, plus purchase documents for capital allowances. You also still need a mileage log, because without it you cannot justify the business percentage.

So actual costs means more paperwork, not different paperwork. The habit that matters is the same: capture receipts when you get them. Fuel receipts are printed on thermal paper and fade quickly in a hot glovebox. Snapping each one into Receipts Keeper at the pump keeps a readable copy with the date, supplier, total and VAT already read, and you can export the year's motoring costs to a CSV for your return or your accountant.

If you are in Making Tax Digital

If you are within Making Tax Digital for Income Tax, your vehicle costs go into your quarterly updates like any other expense. With actual costs, that means a digital record of each cost as it happens. With flat rates, you work out the mileage claim from your log. Either way, keeping records monthly beats doing it all at the end of the year.

Sources

• Simplified expenses if you're self-employed: vehicles, GOV.UK
• Expenses if you're self-employed: car, van and travel expenses, GOV.UK
• Simplified expenses checker, GOV.UK

See also: how long to keep receipts and CIS subcontractors: which receipts and statements to keep.

This article is general information, not tax advice. Rates and rules change, so check with HMRC or an accountant before deciding which method to use.