Mileage rate or actual costs: which is worth more to you

If you are self-employed, you can deduct the cost of business driving one of two ways. Choosing well is worth real money, and the choice is stickier than most people realise.

The two options

Simplified expenses (the mileage rate). Claim a flat 45p a mile for the first 10,000 business miles in the tax year and 25p after that. That figure is meant to cover everything: fuel, insurance, servicing, repairs, road tax, depreciation. You claim nothing else for the vehicle.

Actual costs. Work out what the vehicle really costs you across the year, then claim the business proportion of it. You also claim capital allowances on the purchase price. This means keeping receipts for everything and knowing your business-use percentage.

The rule that catches people

Once you have used the mileage rate for a particular vehicle, you must keep using it for that vehicle for as long as you own it. You cannot claim 45p a mile for three years and then switch to actual costs when the car needs a new gearbox.

It also runs the other way: if you claim capital allowances on a vehicle, the mileage rate is closed to you for that vehicle.

So the decision is made once, early, and lives with the car.

Which usually wins

The mileage rate tends to win when:

• The car was cheap, or was already yours
• You drive a lot of business miles in it
• It is economical, so 45p comfortably exceeds what the mile actually cost
• You would rather not keep every receipt

Actual costs tend to win when:

• The vehicle was expensive, so the capital allowances are substantial
• Business use is a high proportion of total use
• Running costs are genuinely high — a van, something thirsty, something old and needy
• Your annual business mileage is modest, so the flat rate does not add up to much

The rough test: estimate your business miles for the year, multiply by the rate, and compare it against your real annual running costs times your business-use percentage. If the answer is close, the mileage rate is usually the better deal simply because it takes an afternoon less to administer.

You still need the mileage log either way

This is the part people miss. Choosing actual costs does not free you from recording journeys — it makes the record more important, because your business-use percentage has to be justified from somewhere. "About 60%" is not a figure HMRC can check, and neither can you.

Whichever route you take, the underlying evidence is the same: date, from, to, purpose, distance. That is what Milesheet records, and why the log is worth keeping before you have decided which method you are using.

Sources

• HMRC — Expenses if you're self-employed: vehicles
• HMRC — Simplified expenses checker
• HMRC — Travel, mileage and fuel rates and allowances
• HMRC — Self Assessment: keeping your records

General information for UK drivers, not tax advice. The choice between methods has long-term consequences: worth an hour of an accountant's time before you commit.