Business Use of Personal Car — The Two Methods of Claiming

If you're a sole trader or freelancer who uses your own car for business, you're entitled to claim those costs against your tax bill. But here's where it gets interesting — HMRC gives you two entirely different methods for doing so, and the one you choose can make a significant difference to how much tax you save.

The two methods are the simplified mileage rate (also known as the approved mileage allowance) and the actual costs method. Each has its own advantages and drawbacks, and the right choice depends on your specific circumstances — how much you drive, what kind of car you have, and how much you're willing to spend on record-keeping.

Let's break down both methods in detail so you can make an informed decision.

Method 1: Simplified Mileage Rates

This is the method most sole traders use, and it's by far the simpler of the two. Instead of tracking every individual car-related expense, you simply record your business miles and multiply them by HMRC's approved rates.

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The current rates are:

• 45p per mile for the first 10,000 business miles in the tax year
• 25p per mile for every business mile after that

These rates are designed to cover all your running costs — fuel, insurance, road tax, servicing, repairs, depreciation, and everything else. You don't claim any of those costs separately. The mileage rate is meant to be a comprehensive, all-in figure.

Example: If you drive 8,000 business miles in a year, your claim is 8,000 x 45p = £3,600. If you drive 15,000 business miles, it's (10,000 x 45p) + (5,000 x 25p) = £4,500 + £1,250 = £5,750.

The big advantage of this method is simplicity. You don't need to keep receipts for fuel, insurance, or repairs. You just need a record of your business journeys — the date, destination, purpose, and distance for each trip.

The big disadvantage is that for some drivers, particularly those with older, cheaper cars and low running costs, the mileage rates are quite generous and work in your favour. But for others — especially those with newer, more expensive cars and high insurance premiums — the actual costs might exceed what the mileage rates give you.

Important: Once you've used the mileage rate method for a particular car, you must continue using it for that car for as long as you use it in your business. You can't switch to actual costs later. However, if you get a different car, you can choose either method for the new vehicle.

Method 2: Actual Costs

The actual costs method involves tracking every expense related to running your car and then claiming the business-use proportion.

The expenses you can include are:

• Fuel — Petrol, diesel, or electricity for charging an EV
• Insurance — Your annual car insurance premium
• Road tax — Your annual Vehicle Excise Duty
• MOT — The cost of your annual MOT test
• Servicing and repairs — Regular maintenance, tyre replacements, brake pads, and unexpected repairs
• Breakdown cover — AA, RAC, or similar
• Parking and tolls — For business journeys (you can claim these on top of mileage rates too, but they're included in the actual costs method)
• Finance charges — If you bought the car on finance, the interest portion of your payments (not the capital repayment)
• Depreciation/capital allowances — The cost of the car itself, claimed over time through capital allowances

Once you've totalled up all these costs for the year, you apply your business-use percentage. This is calculated based on mileage — divide your business miles by your total miles (business plus personal) to get the percentage.

Example: Your total car running costs for the year are £4,500. You drove 20,000 miles in total, of which 12,000 were for business. Your business-use percentage is 60%. Your claim is £4,500 x 60% = £2,700.

Compare that to the mileage rate: 10,000 x 45p + 2,000 x 25p = £4,500 + £500 = £5,000. In this example, the mileage rate gives you a significantly higher claim.

But now imagine a different scenario. Your total costs are £8,000 (perhaps you have an expensive car with high insurance and had a major repair). Same mileage figures. Your actual costs claim would be £8,000 x 60% = £4,800 — closer to the mileage rate, and potentially exceeding it if your costs are even higher.

The actual costs method requires significantly more record-keeping. You need receipts for every fuel purchase, every repair, every insurance payment. You need a comprehensive mileage log. And you need to calculate capital allowances on the vehicle itself, which adds complexity.

Capital Allowances on Your Car

If you use the actual costs method, you can claim capital allowances on the purchase price of your car. This is essentially a way of deducting the cost of the car over time.

The rate of capital allowance depends on the car's CO2 emissions:

• 0 g/km (fully electric): 100% first-year allowance — you can deduct the entire cost in the year you buy the car
• 1-50 g/km: 18% writing down allowance per year (added to the main rate pool)
• Over 50 g/km: 6% writing down allowance per year (added to the special rate pool)

You only claim the business-use proportion. So if you buy a petrol car for £20,000 with CO2 emissions of 120 g/km, and your business use is 60%, your capital allowance in year one is £20,000 x 6% x 60% = £720.

For electric vehicles, the allowance is dramatically more generous. A £30,000 electric car with 70% business use gives you a first-year allowance of £30,000 x 100% x 70% = £21,000. That's a substantial tax deduction.

This is one reason why the actual costs method can be particularly attractive for sole traders buying electric vehicles. The combination of low running costs and generous capital allowances can make it significantly more tax-efficient than the mileage rate. For more details on how to claim mileage properly, see our guide to claiming mileage when self-employed.

Which Method Should You Choose?

Here's a practical framework for deciding:

Choose simplified mileage rates if:

• You want minimal record-keeping hassle
• Your car is relatively inexpensive to run
• You do moderate business mileage (the 45p rate is quite generous for typical cars)
• You don't want to deal with capital allowances calculations
• You're just starting out and want to keep things simple

Choose actual costs if:

• Your car has high running costs (expensive insurance, frequent repairs, high purchase price)
• You've recently bought an electric or plug-in hybrid vehicle (for the generous capital allowances)
• You do very high business mileage (the drop to 25p after 10,000 miles makes the mileage rate less attractive)
• You're comfortable with detailed record-keeping
• You've done the maths and actual costs come out higher

A common rule of thumb: For most sole traders driving a standard car with moderate business mileage, the simplified mileage rate comes out ahead or roughly equal. The mileage rate tends to be particularly generous for older, cheaper cars with low running costs. The actual costs method tends to win for expensive cars, electric vehicles, and situations where running costs are unusually high.

What Counts as a Business Journey?

Regardless of which method you use, you can only claim for genuine business journeys. Understanding what qualifies is crucial.

Business journeys include:

• Travel to meet clients or customers at their premises
• Trips to suppliers or to collect materials
• Travel to temporary workplaces (sites where you work for less than 24 months)
• Journeys between different work locations in the same day
• Travel to business events, networking meetings, or training courses

Not business journeys:

• Your regular commute from home to your usual place of work (this is personal travel, even if you're self-employed)
• Personal errands, even if you combine them with business trips

The home office exception: If your home is your principal place of business — which it is for many sole traders — then journeys from home to client sites, meetings, and temporary work locations are business journeys. This is a significant advantage of working from home.

Keeping a Mileage Log

Both methods require you to keep a record of your business mileage. For the simplified method, this is your only record-keeping requirement (besides keeping a record of the claim itself). For actual costs, you need the mileage log to calculate your business-use percentage.

Your mileage log should record:

• Date of the journey
• Starting point and destination
• Purpose of the journey (e.g., "Client meeting with ABC Ltd" or "Collected supplies from Screwfix")
• Miles driven

You can keep this in a notebook, a spreadsheet, or an app. Accounted lets you log journeys on your phone as you make them, and Penny keeps a running total of your mileage claim so you always know where you stand. It takes seconds per journey and saves hours at tax time.

The key is consistency. Log every business journey as it happens, not three months later from memory. HMRC won't accept a mileage log that's clearly been reconstructed after the fact.

Can You Switch Between Methods?

As mentioned earlier, once you've chosen a method for a particular car, you're locked in for that car's lifetime in your business. You can't use mileage rates for three years and then switch to actual costs because the car needed an expensive repair.

However, if you change cars, you get a fresh choice. This means you could use mileage rates for your current petrol car and then switch to actual costs when you buy an electric vehicle — taking advantage of the first-year capital allowance.

This is actually a useful planning opportunity. If you know you'll be changing cars soon, it's worth running the numbers for both methods on the new car before you commit.

Parking and Tolls: A Special Case

Parking fees and road tolls for business journeys are always deductible, regardless of which method you use. If you use the simplified mileage rate, you can still claim business parking and tolls on top of your mileage claim. If you use actual costs, parking and tolls are simply added to your other running costs.

Congestion charges (such as the London Congestion Charge or ULEZ charges) for business journeys are also deductible under either method.

Keep receipts or records for all parking and toll payments. Most car parks now offer digital receipts via email or app, which makes record-keeping straightforward. Penny in Accounted can categorise these automatically when they appear on your bank statement.

Making Your Choice

The best approach is to run the numbers for both methods based on your actual situation. Look at your total car running costs for the past year, estimate your business mileage, and calculate the claim under each method. The difference might surprise you.

If you're just starting your business, the simplified mileage rate is usually the safest choice. It's easy to administer, it's generous for most vehicles, and you won't accidentally miss a claimable cost because you lost a receipt. As your business grows and your driving patterns become clearer, you'll be better placed to make an informed decision when you next change vehicles.

For a broader view of all the expenses you can claim as a sole trader, including travel costs beyond just your car, check out our complete guide.

Accounted helps UK sole traders stay on top of their bookkeeping and tax. Start your free 30-day trial at getaccounted.co.uk.

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Related reading:

• How to Claim Mileage When Self-Employed
• The Complete List of Sole Trader Expenses
• Simplified Expenses Method Explained

Related Reading

• Green Business Expenses — What Eco-Friendly Costs Are Deductible
• Claiming Tax Relief on Electric Vehicles — The 2026 Guide

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