Mileage vs. Actual Costs: Which Saves More Tax for Sole Traders?

The Two Methods HMRC Allows

As a sole trader, you can claim tax relief on business vehicle costs using one of two approaches: the simplified mileage allowance (also called HMRC's approved mileage rates) or the actual expenses method, where you claim a proportion of your real running costs. You must pick one method per vehicle — and once you've used actual expenses for a vehicle, you cannot switch to mileage rates later.

Method 1: The Mileage Allowance (Simplified Expenses)

This is the straightforward option. You record every business mile you drive and multiply it by HMRC's approved rates:

• Cars and vans: 45p per mile for the first 10,000 business miles in the tax year, then 25p per mile after that
• Motorcycles: 24p per mile
• Bicycles: 20p per mile

These rates are designed to cover fuel, insurance, servicing, MOT, road tax, and depreciation in one flat figure. You simply multiply your business miles by the rate and deduct that amount from your taxable profit. The record-keeping is minimal — a mileage log showing dates, destinations, and purpose of each journey is all HMRC requires.

Method 2: Actual Vehicle Expenses

With this method, you track every pound you spend running the vehicle — fuel, insurance, servicing, tyres, MOT, road tax, and loan interest if applicable — then claim the business-use percentage of those total costs. You also claim capital allowances on the purchase price of the vehicle through the Annual Investment Allowance or writing down allowances, depending on the car's CO2 emissions.

For example, if you drive 15,000 miles in the year and 9,000 of those are business miles, your business-use percentage is 60%. If your total running costs are £4,200, you can deduct £2,520. You would then separately calculate capital allowances on the vehicle.

Which Method Wins?

The honest answer is: it depends on your vehicle and your mileage. Here are the key factors to consider:

• High-mileage drivers with fuel-efficient cars often come out ahead with mileage rates. At 45p per mile, covering 10,000 business miles gives you a £4,500 deduction — which comfortably beats actual costs for many small, economical vehicles.
• Low-mileage drivers with expensive-to-run vehicles may do better with actual expenses. If your car costs £6,000 a year to run and you use it 70% for business, your deduction would be £4,200 — plus capital allowances on the purchase.
• Electric vehicle owners should think carefully. The 45p mileage rate includes an assumed fuel cost, but EVs have very low running costs. However, capital allowances on new EVs are extremely generous (100% first-year allowance for zero-emission cars), which can make the actual expenses method more attractive.
• New sole traders with a newly purchased vehicle should run the numbers before filing their first return — once you claim actual expenses, you are locked into that method for the life of that vehicle.

Practical Steps to Decide

Before your next Self Assessment return, do this quick comparison:

• Estimate your total annual business miles and calculate the mileage allowance figure
• Add up all your actual vehicle running costs for the year
• Apply your business-use percentage to the actual costs total
• Factor in any capital allowances if using the actual method
• Compare the two deduction figures and choose the higher one — provided you haven't already committed to a method for that vehicle

The Golden Rule: Keep Records Either Way

Whichever method you use, HMRC expects a clear business mileage log. Apps like MileIQ or TripLog make this simple. For actual expenses, keep all receipts and invoices. Good records protect you if HMRC ever raises questions about your return.

If you are unsure which method suits your specific vehicle and income level, the EasyTax calculator can model both scenarios side by side — saving you time and potentially a significant tax bill.