Motor vehicle expenses are one of the most common areas where business owners get confused, and one of the areas HMRC looks at closely.
Can you put your car through the business? Is it better to claim mileage instead? Are electric vehicles really better? What about if you use the vehicle personally?
The answer depends on how your business is structured, how the vehicle is used and the vehicle's CO2 emissions.
Let’s dissect the rules...
Sole Traders: Mileage or Actual Costs?
If you’re a sole trader, you generally have two options for claiming motor vehicle expenses.
1. Simplified Expenses (Mileage Allowance)
You can choose to claim a flat rate per business mile from your company:
45p per mile for the first 10,000 business miles (20p for motorbikes)
25p per mile thereafter (20p for motorbikes)
This rate is designed to cover all your running costs, including fuel, servicing, insurance, repairs, depreciation etc.
You cannot then separately claim those costs!
This method is simple, clean and often works well for small/new businesses or those with low business mileage.
You have to keep detailed mileage logs to support a claim. For every business journey you make, you should record the date, destination, distance and purpose.
2. Actual Costs Method
Alternatively, you can claim the business proportion of your actual motor expenses, including:
Fuel
Insurance
Repairs and servicing
Road tax
Breakdown cover
Lease payments
Capital allowances on purchase - this is a % of the cost of the vehicle when you bought it
For brand new, fully electric cars you can claim 100% in the first year
For new or second hand cars with less than 50g/km CO2 emissions, you can claim 18% of the value of the car in the first year. Each year you claim 18% of the remaining balance.
For new or second hand cars with CO2 emissions over 50g/km the rate is only 6% per year.
This applies to double cab pick-ups purchased/ordered after 1st April 2025 (Companies) or 6th April 2025 (Sole trades/partnerships)
For double cab pick-ups purchased/ordered before then, 100% can be claimed (same for vans & single cab pick-ups)
But, if you have any personal use of the vehicle, your expense claims are restricted. For example, if you use the car 60% for business and 40% personally, you can only claim 60%of the allowable costs.
As with the mileage allowance, you must keep accurate mileage records to justify the business use percentage.
Important point!! Once you choose to claim mileage allowance for a vehicle, you must continue using it for that vehicle. And similarly if you have already claimed any capital allowances for a vehicle, you cannot then claim mileage allowance later.
You cannot switch methods, so it important to choose wisely in the first place!
Limited Companies: Different Rules
If you operate through a limited company, the rules change.
The company can:
Purchase or lease the vehicle
Pay all of its running costs
Claim capital allowances where applicable
With no personal use % restriction.
However, if you use a company vehicle for personal use, it instead creates a taxable Benefit in Kind.
This means:
The director pays personal tax on the value of the benefit (at 20%/40%/45%)
The company pays Class 1A National Insurance (at 15%)
For most petrol and diesel cars, the Benefit in Kind charge is significant, as it is based on the value of the car when new (it's list price) and its CO2 emissions.
In many cases, this means it is not tax efficient to run a company car unless it is electric.
Electric Cars: A Planning Opportunity
Fully electric company cars currently attract very low Benefit in Kind rates compared to petrol and diesel vehicles. Despite rates increasing each year by 1% up to 2029/30, it will still remain more tax efficient to go electric.
The company can claim capital allowances on the purchase (100% first year for brand new, 18% per year for second-hand), and the director’s personal tax charge is far lower than with traditional vehicles.
If you charge your car at a charger at your place of work, this is a tax-free benefit. You can also pay for the installation of a charge point at your home through your company without any tax charge.
If you charge a company car at home, your company can reimburse you for business mileage at its advisory rate (currently 7p per mile but it is adjusted every 3 months).
If you pay personally to charge at public chargers, you can also claim at the advisory rate (currently 14p per mile). However - if you get a charge card in your company name that is paid for directly by your company, the whole cost is covered by the company.
For many limited company directors, this is why choosing to go electric has become one of the most tax efficient ways to run a vehicle through the business.
A caveat though - this still needs reviewing alongside salary levels, dividends and your overall tax planning.
Using Your Own Car in a Limited Company
If you own a car personally and use it for business, your limited company can reimburse you for business mileage at HMRC’s approved rates:
45p per mile for the first 10,000 business miles
25p per mile thereafter
This is often the simplest and most tax efficient approach for many directors. Again, keep detailed mileage logs to support your claim!
The company gets a Corporation Tax deduction (saves tax at between 19% and 25%). You receive the payment tax free.
What You Cannot Claim
There are some common mistakes:
Ordinary commuting from home to a permanent workplace is not allowable
If you commute in a company vehicle, it means you have private use!
Fines and penalties are not allowable
Purely personal fuel is not allowable
Claiming 100 percent of costs where there is clear personal use will not stand up to scrutiny - I've had clients be caught out by HMRC on this point in the past!
Good records matter. Mileage logs matter. Evidence matters. I'm not just saying it - I've seen first hand how important it is.
So What’s Best?
Unfortunately, there is no one size fits all answer.
The right approach depends on:
Whether you are a sole trader (or partner) or limited company
How much business mileage you are doing/planning on doing
The type and value of the vehicle
Your wider tax position
Whether there is personal use or not
Motor expenses can either be straightforward and tax efficient, or unnecessarily expensive if structured badly.
If you are unsure whether you are claiming correctly, or you are considering buying a new vehicle and want to structure it properly from the outset, it is worth getting advice before making the decision!
At Zenith Digital Accountants, we are well-versed in helping business owners work out which option you should go for. We can calculate the benefits and costs of each option for you so that you can make a fully-informed decision.
If you want our help with choosing the best option for you, then Get In Touch with us today.
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