Depreciation: the biggest cost of your car, and the one nobody counts

Ask someone what their car costs and they will tell you what they spend on fuel. It is the visible cost, because you hand money over for it in small, memorable amounts.

For most drivers it is not the biggest one.

The shape of the real bill

Across a typical year, the costs stack up roughly like this:

• Depreciation — usually the largest single item on a car under about eight years old
• Fuel — the one you notice
• Insurance
• Servicing, tyres, MOT and repairs
• Road tax

A three-year-old car losing £1,200 a year in value, while burning £1,400 of fuel, is not unusual. On a newer or more expensive car, depreciation can dwarf everything else — a £30,000 car shedding 40% in three years is losing about £4,000 a year, roughly £77 a week, while you sleep.

Why this matters for a mileage claim

It explains the 45p.

HMRC's approved mileage rate is not a fuel reimbursement. It is meant to cover the whole cost of running your own car for business: fuel, insurance, servicing, tyres, road tax and depreciation. That is why it is so much higher than the Advisory Fuel Rates used for company cars, where the company already owns the asset and is absorbing the depreciation itself.

People who think of 45p as "generous because petrol is only about 12p a mile" are comparing it against one line of a five-line bill.

The mileage connection

Depreciation is partly time and partly miles. Two identical cars, one at 6,000 miles a year and one at 20,000, will not be worth the same in three years.

Which means high-mileage drivers are absorbing a larger cost than the fuel gauge suggests — and it is exactly those drivers for whom recording business mileage properly is worth the most, because the claim is what offsets it.

Knowing your own number

The honest cost per mile is total annual costs divided by annual miles, not pence per litre.

Milesheet gets you part of the way automatically: it works out your real fuel cost per mile from your own fill-ups rather than a brochure figure. The rest — insurance, servicing, the value the car quietly lost — is worth adding up once a year, if only to know whether the 45p you are claiming is generous or barely covering it.

For most people it is generous. For someone running a thirsty vehicle hard, it is not, and that is the case where actual costs deserve a look instead.

Sources

• HMRC — Travel, mileage and fuel rates and allowances
• HMRC — Advisory fuel rates
• HMRC — Expenses if you're self-employed: vehicles
• DVLA — Vehicle tax rate tables