Mileage Rate vs Actual Vehicle Costs 2026/27: Which Method Saves You More Tax?
If you’re self-employed and use a vehicle for business, HMRC gives you two ways to claim: the simplified mileage rate (55p/mile for cars) or your actual vehicle expensesapportioned by business use. This guide explains both methods with worked examples so you can make the right choice — before it’s too late to switch.
At a Glance: Mileage Rate vs Actual Costs
| Factor | Mileage Rate (55p/mile) | Actual Costs |
|---|---|---|
| Who can use it | Sole traders & partnerships | Sole traders, partnerships & limited companies |
| Record keeping | Mileage log only | All receipts + mileage log for apportionment |
| Covers | All vehicle running costs inc. depreciation | Fuel, insurance, servicing, repairs, finance interest, capital allowances |
| VAT reclaim | Not applicable (no VAT on mileage) | Can reclaim VAT on fuel via advisory fuel rates |
| Can switch later? | Can switch TO actual costs (not back) | Cannot switch back to mileage rate |
| Best for | High-mileage users with average vehicles | Low-mileage users with expensive vehicles |
Method 1: HMRC Simplified Mileage Rate (55p/Mile)
The HMRC Approved Mileage Allowance Payment (AMAP) rate is a flat pence-per-mile rate that covers all vehicle costs. You multiply your business miles by the rate — no receipts needed beyond a mileage log.
| Vehicle | First 10,000 miles | Over 10,000 miles |
|---|---|---|
| Car or van | 55p | 25p |
| Motorcycle | 24p | 24p |
| Bicycle | 20p | 20p |
What does 55p/mile actually cover?
The mileage rate is designed to cover fuel, oil, tyres, servicing, insurance, vehicle excise duty, MOT, breakdown cover, hire charges, and depreciation. It does not cover parking, tolls or congestion charges — those are claimed separately.
Method 2: Actual Vehicle Expenses
With the actual costs method, you add up all vehicle expenses for the year, then multiply by your business use percentage to find your allowable deduction. You also claim capital allowances on the vehicle purchase price separately.
Allowable actual costs
- ✓Fuel
- ✓Car insurance
- ✓Road tax (VED)
- ✓MOT
- ✓Servicing and repairs
- ✓Tyres
- ✓AA/RAC membership
- ✓Hire or lease payments
- ✓Finance interest (not capital)
- ✓Cleaning
Calculating business use percentage
Business use % = (Business miles ÷ Total miles) × 100
Example:
Total miles driven: 15,000
Business miles: 9,000
Business use = 9,000 ÷ 15,000 = 60%
You can then claim 60% of each actual expense item.
Side-by-Side Worked Example
Scenario
- Driver: Sophie, sole trader, basic rate taxpayer (20%)
- Car: 2-year-old diesel hatchback, £18,000 value at start of year
- Total miles: 14,000 (9,000 business / 5,000 private)
- Business use: 64.3%
Method 1: Mileage Rate
Method 2: Actual Costs
Result: For Sophie, the simplified mileage rate saves £119 more in tax (£990 vs £871).
The mileage rate wins here because Sophie’s running costs are modest and her car has already depreciated. For a brand-new, high-value vehicle with large capital allowances, actual costs might win.
When Actual Costs Might Beat the Mileage Rate
The actual costs method tends to outperform the mileage rate in specific circumstances:
- ★Brand-new expensive vehicles: A new car qualifies for a large first-year capital allowance (if it's a low-emission vehicle, 100% first-year allowance). The depreciation element alone can exceed 55p/mile in year one.
- ★Low annual mileage, high fixed costs: If you drive fewer than 5,000 business miles per year but have high insurance or lease costs, the fixed costs can outweigh what 55p/mile generates.
- ★Vehicles with high running costs: Older, higher-emission vehicles with expensive fuel consumption and regular servicing needs. If actual costs exceed 55p/mile per business mile, actual costs win.
- ★Higher-rate taxpayers with large capital allowances: At 40% or 45% tax rate, large capital allowances on a new or qualifying vehicle can produce significant deductions that the flat rate cannot match.
The Switching Trap: You Can't Go Back
Critical: The choice is locked in per vehicle
Once you start using actual costs for a vehicle in your Self Assessment, you cannot switch back to the mileage rate for that vehicle. This is permanent. HMRC does not allow it.
You can switch from the mileage rate to actual costs (before filing your first return using actual costs), but never in the other direction. This means your first-year decision matters enormously. If in doubt, start with the mileage rate — you retain the option to switch later.
Limited Company Directors: A Different Set of Rules
The simplified mileage rate (55p/mile) is primarily a self-employed tool under the simplified expenses regime. For limited company directors, the situation works differently:
- →Personal vehicle (director's own car): The company reimburses the director at up to 55p/mile — tax-free for the director, fully deductible for the company as a business expense. This is the AMAP rate, not simplified expenses.
- →Company-owned vehicle: The company claims actual running costs as corporation tax deductions. Capital allowances apply. The director may pay a Benefit in Kind (BiK) charge. Fuel-only reimbursement uses HMRC advisory fuel rates.
- →No simplified expenses for companies: The simplified expenses regime does not apply to limited companies — only to sole traders and partnerships. Companies always use actual costs for company vehicles.
Which Method Should You Choose?
| Your situation | Likely better method |
|---|---|
| High business mileage (10,000+ miles/year), average car | Mileage rate (55p/mile) |
| Low business mileage but expensive lease or finance | Actual costs |
| Brand-new car, low-emission (100% first-year allowance) | Actual costs (year 1) |
| Electric vehicle, low running costs | Mileage rate |
| VAT-registered business wanting to reclaim fuel VAT | Actual costs (use advisory fuel rates for VAT) |
| Limited company director using personal car | AMAP reimbursement at 55p/mile |
| Sole trader wanting minimal admin | Mileage rate (mileage log only) |
Track Your Business Mileage — Free
Whichever method you choose, you’ll need an accurate mileage log. MileageClaim generates HMRC-compliant records automatically — no spreadsheets needed.
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