How to claim mileage allowance
Many self-employed people claim mileage allowance to claim back the cost of using your own vehicle for business. Find out how to do so in this blog from GoSimple Tax.
This blog is just one of many resources IPSE provides for those seeking guidance and support on tax as a self-employed person.
To find it all in one place, visit our Self-Employed Tax advice page.
Self-Employed Tax
Reportedly, there are more than 5m leased vehicles being driven on UK roads, such has been the growth in the popularity of vehicle leasing in recent years.
Historically, businesses and fleet customers dominated the UK vehicle leasing market, but personal vehicle leasing now has the biggest market share, partly fuelled by increased taxation on company cars, while many are now simply choosing vehicle “usership” over ownership.
If you’re a self-employed contractor, freelancer or other sole trader considering leasing a vehicle, either wholly or partly for work, you should know the tax implications, chiefly, whether leasing costs can be offset against your profits to reduce your tax bill. This guide answers key questions regarding reporting and paying tax when you lease a vehicle for work if you’re a self-employed contractor, freelancer or sole trader.
Here’s what we’ll cover
Many contractors, freelancers and sole traders continue to be attracted to the advantages of vehicle leasing. Leasing enables you to drive a newer, perhaps higher-spec vehicle more often than you may otherwise could afford. Newer cars are less likely to cause you hassle by breaking down. And you may only have to stump up a relatively small amount upfront to lease a vehicle (although monthly repayments are cheaper the more you put down).
You needn’t worry about value depreciation when you lease, because you’re essentially just renting the vehicle. You don’t have to buy at the end of the contract; you can lease a new vehicle, either from the same “lessor” or one that offers a better deal.
Leasing can keep your cash flow healthier, because leasing works out cheaper than buying the same vehicle. And growing numbers are leasing as an affordable way to drive more environmentally friendly vehicles, with high-emission vehicle drivers now having to pay additional charges to enter some UK cities. Free breakdown recovery and Vehicle Excise Duty (aka vehicle tax) are usually included in the deal, too.
What about the disadvantages? Well, the vehicle won’t ever be an asset that you own (that said, according to the AA, new vehicle value depreciates by up to 40% at the end of the first year of ownership anyway). When you lease, you must give the vehicle back at the end of the contract term, unless you have a Personal Contract Purchase deal and make a final payment, which can be many thousands of pounds.
And if you go over the agreed mileage limit (eg 36,000 miles over three years), you’ll face additional mileage payments at the end of the contract, when you could also have to pay wear-and-tear or repair costs. Moreover, the cost can also be quite high if you want to hand the vehicle back before the contract is up, which isn’t always allowed anyway.
Leasing a vehicle still means having to pay for maintenance and servicing, as well as your own vehicle insurance, of course. A credit check may be carried out when you make your leasing application, which means approval isn’t a given.
Need to know! Leasing may not be the best solution for you. Carefully weigh up the pros and cons and crunch the numbers before deciding whether to lease or buy a vehicle.
Think of leasing as taking out a rental contract or agreement. You (the “lessee”) make a down payment and then make the same monthly payment to the vehicle provider (the “lessor”).
Contract terms can range from two years (24 months) to five years (60 months), with three-year contracts common. The three main car-leasing contract options are:
Leasing (or hiring) a car is an allowable expense (ie tax-deductable), but CO2 emissions should be carefully considered when you’re choosing a vehicle to lease. As explained by HMRC: “In some cases, if you lease or hire a car you cannot claim all of the hire charges or rental payments. For example, if you leased a car on or after 6 April 2020 and the CO2 emissions are more than 110g/km, you must disallow 15% of the hire charge or rental cost.”
Need to know! In fact, the rules have changed; from April 2021, you must disallow 15% of hire charges or rental costs if your vehicle’s CO2 emissions are more 50g/km. For cars leased/hired before 1 April 2021, 110g/km still applies (visit government website GOV.uk for HMRC guidance).
When speaking to vehicle lessors, ask about the tax implications of the vehicle’s CO2 emissions. If you use a lease or hire vehicle for personal use, you cannot claim this proportion as an allowable expense, you must calculate and deduct it.
As a sole trader or self-employed contractor or freelancer, each year, you report your vehicle-leasing costs (as well as any other allowable vehicle- and non-vehicle-related expenses) via your Self Assessment tax return (SA100). These will be deducted from your earnings, with other reliefs and allowances accounted for. You then pay Income Tax and any National Insurance contributions that are due.
Need to know! If you’re VAT-registered and lease a car, you can usually claim 50% of the VAT – or all of it if the car is used only for business. VAT-registered businesses can claim all of the VAT charged for maintenance on leased vehicles.
Rather than claim for leasing and other car-related costs (eg insurance, vehicle repairs, servicing, fuel, parking, etc), you could claim simplified expenses, which is a flat-rate scheme that can offer a far simpler way to claim for business-related vehicle use.
If you’re self-employed, each year you can claim a mileage allowance of 45p per business mile for the first 10,000 miles each year and 25p per business mile thereafter. You cannot claim mileage allowance for vans. Leasing costs can be significant, that’s before factoring in other costs, which could mean claiming mileage allowance leaves you worse off.
Need to know! Crunch the numbers before deciding whether to claim simplified expenses, because although it could save you time, it can leave you out of pocket, as leasing costs can be substantial. You cannot claim both simplified expenses and leasing and other actual vehicle costs. For guidance, seek advice from a qualified tax professional.
About GoSimpleTax
Income, expenses and tax submission all in one.
GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.
The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way.
GoSimpleTax does all the calculations for you saving you ££’s on an accountant. Available on desktop or mobile application.
Many self-employed people claim mileage allowance to claim back the cost of using your own vehicle for business. Find out how to do so in this blog from GoSimple Tax.
IPSE provides you with all the advice and guidance required to ease the burden of tax, delivered by knowledgeable and friendly taxation experts at Markel.
Find out how to be tax efficient, read expert tips about Self Assessments and tax year end, and learn about the importance of digital record keeping.
Income, expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.
The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you saving you ££’s on an accountant. Available on desktop or mobile application.
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