A sole trader or individual partnership can claim a vehicle either at the flat mileage rate (55p a mile for the first 10,000 business miles from 6 April 2026, then 25p) or by deducting the business share of actual running costs plus capital allowances on the purchase price. The flat rate usually suits a modest car doing a lot of business miles; actual costs usually suit an expensive or new electric car, or a vehicle with high running costs and fewer miles. Whichever you pick first for a vehicle binds you until that vehicle leaves the business, so the choice should be made when the vehicle is first used, not at the year end.

What are the two methods?

The flat rate under section 94D of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) gives a deduction of business miles multiplied by the rate in section 94F. It replaces everything to do with acquiring, owning, hiring, leasing or using the vehicle. How the rate works is covered in our page on flat rate mileage for the self employed.

The actual cost method is the normal rule. You deduct the business proportion of fuel, insurance, servicing, repairs, road tax, breakdown cover and similar costs, which GOV.UK lists as allowable for the self employed, and you claim capital allowances on the cost of buying the vehicle. Both methods let you claim parking, tolls and congestion charges for business journeys on top.

Limited companies cannot use the flat rate, so this choice only arises for sole traders and partnerships whose partners are all individuals. See our wider guide to simplified expenses.

How do capital allowances on a car work?

Cars are treated less generously than vans. GOV.UK confirms that cars do not qualify for the annual investment allowance or the 40% first year allowance, so the allowance depends on CO2 emissions. For cars bought from April 2021:

Car Allowance
New and unused, 0g/km or electric, bought before April 2027 100% first year allowance
Second hand electric, or any car at 50g/km or less Main rate writing down allowance, 14% a year (18% before April 2026)
Over 50g/km Special rate writing down allowance, 6% a year

The 14% main rate is in section 56 of the Capital Allowances Act 2001 (CAA 2001) and the 6% special rate in section 104D. For an unincorporated business the main and special rates apply from 6 April. Our page on capital allowances on cars covers the older emission bands.

Vans and motorcycles are not cars for capital allowances, so they can usually get the annual investment allowance and be written off in the year of purchase.

How is private use dealt with under actual costs?

Running costs are split on a fair basis, usually business miles as a share of total miles. Capital allowances are restricted too. Section 206 CAA 2001 puts a vehicle used partly for non business purposes into its own single asset pool, and section 207 cuts the writing down allowance, balancing allowance and any balancing charge to an amount that is just and reasonable having regard to the private use. Section 205 does the same to any first year allowance. GOV.UK puts it simply: if you use the car outside your business, work out what you can claim based on the amount of business use.

If you lease rather than buy, there are no capital allowances, but section 48 ITTOIA 2005 reduces the deduction for hiring a car by 15% unless an exception applies, such as an electric car or one with low CO2 emissions.

Why is the choice fixed for that vehicle?

The lock works in both directions and comes from the legislation itself.

  • Flat rate first: section 94D(4)(b) says that once a deduction is made under the section, it applies to that vehicle for every later period in which the vehicle is used in the trade. Section 38ZA CAA 2001 stops expenditure covered by a flat rate deduction from counting for capital allowances.
  • Actual costs first: section 94E makes a vehicle an excluded vehicle if capital allowances have been claimed on it at any time. For a van or motorcycle, the same applies if any of its purchase cost was deducted as an expense under the cash basis.

HMRC summarises this at BIM75005: once the mileage basis is adopted for a vehicle it must be applied for as long as the vehicle remains in the business, and the business can only change to or from the actual basis when the vehicle is replaced. HMRC’s reason for the capital allowances bar is that the flat rate already includes an element for depreciation. GOV.UK also notes that you do not have to use the same method for every vehicle, so a business can run one car on the flat rate and a van on actual costs.

How does the cash basis change things?

The cash basis does not stop you using either method. Under it, the cost of a car still goes through capital allowances, so a car bought by a cash basis trader can be claimed either way. A van or motorcycle is different: under the cash basis its purchase is deducted as an ordinary expense, and once that is done the flat rate is lost for that vehicle. Our guide to cash basis and accruals accounting explains the wider differences.

Which gives the bigger deduction?

Illustration only. Both examples use the 2026 to 2027 rates and assume 60% business use.

An older petrol car. A consultant buys a second hand car for £8,000 with emissions over 50g/km. Running costs are £3,000 a year and business mileage is 6,000 of 10,000 total miles.

  • Actual costs: 60% of £3,000 running costs is £1,800, plus a special rate allowance of 6% of £8,000, which is £480, reduced to 60%, giving £288. Total £2,088.
  • Flat rate: 6,000 miles at 55p is £3,300.

A new electric car. The same consultant instead buys a new electric car for £40,000 with running costs of £1,500 a year.

  • Actual costs in year one: a 100% first year allowance reduced for private use to 60% of £40,000, which is £24,000, plus 60% of running costs, £900. Total £24,900.
  • Flat rate: £3,300 a year, as before.

The flat rate is better for the cheap car. For the electric car, actual costs give a large first year deduction, but when the car is sold the sale proceeds come back as a balancing charge, reduced for private use, so the total relief over the car’s life is roughly its business share of the fall in value plus running costs. GOV.UK also offers an online simplified expenses checker that compares the two methods using your own figures.

What happens when the vehicle is sold or replaced?

On the flat rate, nothing is brought into the tax computation when the vehicle is sold, because no allowances were given. On actual costs, the sale proceeds are a disposal value in the single asset pool, producing a balancing allowance or balancing charge that is scaled down for private use under section 207. A replacement vehicle is a fresh decision: the lock attaches to the vehicle, not to the business.

What mistakes come up most often?

  • Claiming capital allowances on a car in the first year, then trying to move it to the flat rate when the allowances shrink.
  • Deducting a van’s cost under the cash basis and then claiming mileage for it.
  • Forgetting the private use restriction on capital allowances and on the balancing charge.
  • Claiming the full lease rental on a higher emission car without the 15% disallowance.
  • Choosing at the year end with hindsight rather than recording the method when the vehicle starts being used.

VAT on vehicles and fuel follows separate rules, explained in our page on VAT on cars, vans and fuel.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.