Buying a Car for Your Sole Trader Business: Capital Allowances or a Mileage Claim?

A sole trader buying a car must choose between a mileage claim worth 55p a mile for the first 10,000 business miles in 2026/27, or capital allowances plus a share of actual running costs, and that choice is locked in for as long as the vehicle is owned. Picking the wrong method at the outset can cost thousands of pounds of relief over the life of a car, and it cannot be undone by changing your mind next year. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, works with sole traders who want that decision made once and made correctly. This guide covers how the HMRC mileage claim works for the self-employed in 2026/27, what capital allowances a car actually attracts, which method wins at different mileages, why an electric car changes the answer entirely, and what records HMRC now expects.

Key Takeaways

• The HMRC approved mileage rate for the self-employed is 55p a mile for the first 10,000 business miles in 2026/27 and 25p a mile thereafter, covering fuel, insurance, servicing, repairs and depreciation.
• Cars do not qualify for the Annual Investment Allowance or full expensing, so relief on the purchase price comes only through writing down allowances at 14% or 6% a year depending on CO2 emissions.
• A new and unused zero-emission car qualifies for a 100% first year allowance on expenditure incurred up to 5 April 2027 for income tax, giving full relief in the year of purchase.
• Once capital allowances are claimed on a vehicle, the mileage rate can never be used for that vehicle, and once the mileage rate is used it must be kept for as long as the vehicle is owned.
• Sole traders with qualifying income above £50,000 have been inside Making Tax Digital for Income Tax since 6 April 2026 and must submit quarterly updates on 7 August, 7 November, 7 February and 7 May.
• Where a car has private use, both the writing down allowance and the running costs must be restricted to the business proportion.

Should a sole trader make a mileage claim or claim capital allowances on a car?

A sole trader can use either the HMRC mileage rate or capital allowances on actual costs for a given vehicle, but not both, and the method chosen must be kept for as long as that vehicle is owned. The decision is made once, in the first tax year the vehicle is used in the business, and is worth modelling before the car is bought rather than after.

The mileage rate, part of HMRC's simplified expenses regime, replaces every cost of running the vehicle with a single figure per business mile. Fuel, insurance, road tax, servicing, repairs, tyres, breakdown cover and the fall in the car's value all sit inside the rate, and none can be claimed separately. The actual-cost method does the opposite: the purchase price is relieved through capital allowances over several years and the running costs are claimed as they arise, both restricted to the business proportion of use.

High business mileage in a cheap, efficient car favours the mileage rate. A high purchase price, low mileage, or a zero-emission car favours capital allowances, because relief then follows the price of the car rather than the distance travelled.

How does the HMRC mileage claim work for the self-employed in 2026/27?

The HMRC approved mileage allowance for the self-employed is 55p for each of the first 10,000 business miles in the 2026/27 tax year and 25p for every business mile above that. A sole trader driving 8,000 business miles claims £4,400. One driving 15,000 claims 10,000 at 55p, which is £5,500, plus 5,000 at 25p, which is £1,250, giving £6,750. The 10,000-mile counter resets each tax year and applies per vehicle.

Business mileage means journeys made wholly for the purposes of the trade. Travel between home and a regular place of work does not count, and where a journey mixes business and private purposes only the business element qualifies. Parking and tolls on a business journey sit outside the rate and are claimed separately as allowable business expenses, while parking penalties and speeding fines are never deductible. Our guide to keeping a mileage log HMRC will accept sets out the evidence required.

One restriction catches people out: the mileage rate cannot be used for a vehicle on which capital allowances have already been claimed, even in an earlier year.

What capital allowances can a sole trader claim on a car, including an electric one?

Cars are excluded from both the Annual Investment Allowance and full expensing, so relief on the purchase price comes only through writing down allowances, at 14% a year for a car below the CO2 threshold and 6% a year for one above it. The 14% main pool rate replaced the previous higher rate from 6 April 2026 for income tax, which slows relief further.

Writing down allowances work on a reducing balance, so relief tails off over many years rather than arriving up front. A car used partly privately goes into its own single asset pool: the allowance is calculated on the full pool balance and then reduced to the business proportion, and the unclaimed private share is never recovered.

The exception is significant. A new and unused zero-emission car qualifies for a 100% first year allowance on expenditure incurred up to 5 April 2027 for income tax purposes, extended by a year at Autumn Budget 2025. On a new £30,000 electric car with 70% business use, the allowance is £21,000 in the year of purchase, worth £5,460 to a sole trader paying 20% income tax and 6% Class 4 National Insurance, or £8,820 to one paying 40% and 2%. Two cautions apply: a second-hand electric car does not qualify, and a balancing charge arises on later sale, making the benefit a timing advantage rather than a permanent one.

Worked example: a mileage claim versus actual costs on a £20,000 car

On a £20,000 used petrol car with 70% business use, 8,000 business miles and £4,500 of annual running costs, the mileage claim gives £4,400 of relief against £3,990 under the actual-cost method, so the mileage rate wins by £410 in year one and by more in every later year.

The actual-cost figures work like this. The car sits above the CO2 threshold, so it goes into a single asset pool at the 6% special rate. The year one writing down allowance is £20,000 at 6%, which is £1,200, restricted to 70%, giving £840. Running costs of £4,500 restricted to 70% give £3,150, so total relief is £3,990. The mileage claim is simply 8,000 at 55p, or £4,400, with no separate deduction for running costs.

The gap then widens. In year two the pool balance is £18,800, so the allowance falls to £1,128 before restriction and £790 after it, while the mileage claim holds at £4,400 for the same mileage. At 15,000 business miles the mileage claim rises to £6,750 and the actual-cost figure does not move at all, because relief under that method depends on the cost of the car, not the distance driven.

What records does HMRC expect under Making Tax Digital?

HMRC expects a contemporaneous record of every business journey under either method, showing the date, destination, purpose and mileage, plus purchase and running cost invoices where actual costs are claimed. A log reconstructed at the year end is the weakest possible evidence in an enquiry and is routinely challenged.

Record-keeping stopped being optional in practice on 6 April 2026. Sole traders with qualifying income above £50,000, tested on the 2024/25 tax year, are inside Making Tax Digital for Income Tax and must keep digital records and submit quarterly updates on 7 August, 7 November, 7 February and 7 May, followed by a final declaration by 31 January. Qualifying income is gross turnover before expenses, not profit. Those above £30,000 join from April 2027 and those above £20,000 from April 2028.

Quarterly reporting makes the vehicle decision more visible. Under the mileage method a running log feeds straight into each update, while under the actual-cost method the capital allowance is calculated once at the final declaration and running costs are reported quarterly, so the business-use percentage must be defensible from the start.

Frequently Asked Questions

What is the mileage rate for self-employed people in 2026/27?

The HMRC approved mileage rate for the self-employed is 55p for each of the first 10,000 business miles in the 2026/27 tax year and 25p for every business mile above 10,000. The rate covers fuel, insurance, road tax, servicing, repairs and depreciation, none of which can be claimed separately alongside it.

Can a sole trader switch from mileage to capital allowances on the same car?

No. Once the mileage rate has been used for a vehicle, it must be used for that vehicle for as long as the business owns it. The reverse applies too: a vehicle on which capital allowances have been claimed can never move onto the mileage rate. A different method can be chosen for the next vehicle bought.

Can a sole trader claim the Annual Investment Allowance on a car?

No. Cars are specifically excluded from both the Annual Investment Allowance and full expensing. Relief on the purchase price comes through writing down allowances at 14% or 6% a year depending on CO2 emissions, or through the 100% first year allowance where the car is new, unused and zero-emission.

What capital allowance can a sole trader claim on an electric car?

A new and unused zero-emission car qualifies for a 100% first year allowance on expenditure incurred up to 5 April 2027 for income tax purposes. On a £30,000 electric car used 70% for business, that is a £21,000 deduction in the year of purchase, worth £5,460 to a basic rate sole trader paying 20% income tax and 6% Class 4 National Insurance.

Do mileage claims need to be reported quarterly under Making Tax Digital?

Sole traders with qualifying income above £50,000 have been inside Making Tax Digital for Income Tax since 6 April 2026 and must report expenses, including vehicle costs, in quarterly updates due on 7 August, 7 November, 7 February and 7 May, with a final declaration by 31 January. Qualifying income means gross turnover before expenses.

How Blue Tick Can Help

Blue Tick Accountants models the mileage and capital allowance routes side by side before a vehicle is bought, using real mileage, real running costs and the correct 2026/27 rates, so the decision is made on the numbers rather than by default. That modelling matters most on electric vehicles, where the 100% first year allowance and the eventual balancing charge both need to be understood before the purchase is made. Head to our website and book a meeting now.

Conclusion

The vehicle method decision is one of the few tax choices a sole trader makes that cannot be reversed, and the right answer turns on three things: annual business mileage, the cost of the car, and whether it is electric. High mileage in a modest car points firmly at 55p a mile. A new zero-emission car points just as firmly at capital allowances and full relief in year one. Run both sets of numbers before signing for the vehicle, because afterwards the choice has already been made for you.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps the self-employed, landlords and limited company owners across the UK. Leon advises sole traders on expense claims, capital allowances and Making Tax Digital compliance. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.