Mileage Allowance or Actual Costs: Which Is Better for Taxi Drivers? (2026/27)

For most UK taxi and private hire drivers, the choice comes down to how many miles you do and how much your car costs to run. HMRC's mileage rate (55p a mile for the first 10,000 business miles, then 25p) is simple and often wins for a cheap-to-run car you own. Actual costs usually win if you rent your car, do very high mileage, pay big insurance bills, or buy a new electric car. Black cabs can't use the mileage rate at all.

Once you pick a method for a car, you're stuck with it until you change that car. So it's worth ten minutes with a calculator before your next tax return.

What are the two methods?

You pay tax on your profit: fares minus allowable expenses. Your car is usually your biggest expense, and HMRC gives you two ways to claim it.

Method 1: The mileage rate (simplified expenses)

You claim a flat amount for every business mile. For the 2026/27 tax year (6 April 2026 to 5 April 2027) the rates for cars are:

• 55p a mile for the first 10,000 business miles
• 25p a mile for every business mile after that

The 55p rate is new. It was 45p for years, and the government announced the rise on 21 May 2026, backdated to 6 April 2026. The 25p rate didn't change.

The flat rate covers everything to do with buying and running the car: fuel, insurance, repairs, servicing, tyres, road tax and wear and tear. You can't claim any of those on top. You can still claim parking, tolls and congestion charges paid while working.

Method 2: Actual costs

You add up what the car really costs you in the year, then claim the business share. If 80% of your miles are work miles, you claim 80% of the costs. That includes:

• fuel or charging
• taxi or private hire insurance
• servicing, repairs, tyres and MOT
• road tax and breakdown cover
• rent or lease payments if you hire the car
• cleaning and valeting

If you buy the car, you don't claim the price as a normal expense. You claim capital allowances on it instead (more on that below). Parking, tolls and congestion charges are claimed on top, the same as with the mileage rate.

For the full list of what else you can claim (phone, licence fees, app commission and so on), see our guide to taxi driver expenses.

Who can't use the mileage rate?

• Black cabs and hackney carriages. GOV.UK says cars "designed for commercial use, such as black cabs, hackney carriages" can't use the flat rate. If you drive a purpose-built cab, you use actual costs. Simple as that.
• A car you've already claimed capital allowances on. If you bought your car and have been claiming allowances, you can't switch that car to the mileage rate.
• A car whose costs you've already claimed as expenses in working out your profit.
• Limited companies. The flat rate is for sole traders and partnerships.

The "stick with it" rule

This is the bit that catches people out. HMRC's own manual says that once you use the mileage rate for a car, it "must be applied consistently from year to year for as long as the vehicle remains in the business". You can only change method when you change the car.

It works the other way too. Claim capital allowances on a car you've bought, and you can't move that car onto the mileage rate later.

You don't have to use the same method for every vehicle, though. If you change cars, you get a fresh choice.

Worked examples

These use made-up round numbers to show the sums. Plug in your own.

Example 1: Sam, private hire, owns a used hybrid

Sam bought a used hybrid for £12,000. He does 30,000 miles a year, and 24,000 of those are work. That's 80% business use.

Mileage rate:

• First 10,000 miles at 55p = £5,500
• Next 14,000 miles at 25p = £3,500
• Total claim: £9,000

Actual costs:

• Fuel £3,600, insurance £2,000, servicing, repairs and tyres £1,500, road tax, MOT and breakdown £400, cleaning £300. Total £7,800.
• 80% business share = £6,240
• Capital allowance: his car's CO2 figure is over 50g/km, so it gets 6% a year. 6% of £12,000 is £720, and 80% of that is £576.
• Total claim: £6,816

The mileage rate gives Sam £2,184 more in expenses. For a basic-rate taxpayer paying 20% income tax and 6% Class 4 National Insurance, that's roughly £570 less tax this year.

Example 2: Priya, private hire, rents her car

Priya rents a car for £280 a week with insurance included, for 48 weeks a year. That's £13,440 in rent. She spends £2,500 on charging and £300 on cleaning. Total £16,240. She does 30,000 business miles and uses the car 90% for work.

Mileage rate: £5,500 for the first 10,000 miles plus £5,000 for the next 20,000 (at 25p) = £10,500

Actual costs: 90% of £16,240 = £14,616

Actual costs give Priya £4,116 more in expenses, which saves her roughly £1,070 at basic rate. When your weekly rent includes insurance, the mileage rate often can't keep up.

Why high mileage changes the picture

Look at what happens after 10,000 miles: the rate drops from 55p to 25p. A full-time driver doing 40,000 business miles would claim £5,500 plus £7,500, so £13,000. That's an average of about 33p a mile. If your real cost per mile is higher than that, actual costs will usually win.

Buying a new electric car? Read this first

If you buy a new, unused, zero-emission (fully electric) car, you can claim a 100% first-year allowance. That means you can claim the whole business share of the price in the year you buy it, rather than a small slice each year.

The government has extended this allowance to 5 April 2027 for sole traders paying income tax. So if you're thinking about a new EV, the timing matters.

Other cars get capital allowances spread over time:

• cars with CO2 of 50g/km or less (including second-hand electric cars) go in the main pool at 14% a year (it was 18% before April 2026)
• cars over 50g/km go in the special rate pool at 6% a year

Two things to know before you jump in. First, if you also use the car privately, you can only claim the business share. Second, when you later sell a car you've claimed allowances on, what you sell it for is taken into account, and that can add some profit back to your tax bill. An accountant can work this out for you.

A quick note on renting and leasing

If you hire or lease a car with CO2 over 50g/km and use traditional (accruals) accounting, HMRC disallows 15% of the hire cost. This rule doesn't apply if you use the cash basis, which GOV.UK now calls "the standard way" for sole traders to keep their books. If you're not sure which you use, ask your accountant.

So which should you choose?

The mileage rate tends to suit you if:

• you own a cheap-to-run car, like a used hybrid
• your insurance and repair bills are modest
• you do lower or medium mileage
• you want less paperwork (no need to keep every fuel receipt)

Actual costs tend to suit you if:

• you drive a black cab (you have no choice)
• you rent or lease your car, especially with insurance included
• you do very high mileage, well past 10,000 business miles
• your insurance is expensive (see how much taxi insurance costs, or get quotes from our partners The Taxi Insurer and Gomigo on our insurance page)
• you're buying a new electric car and want the 100% allowance

If it's close, remember the method locks in for the life of the car. Run the numbers both ways, and if you're unsure, ask an accountant before you file the first return for that car.

Keep a mileage log either way

Whichever method you choose, HMRC can ask you to prove how many of your miles were for work. A simple log does the job:

1. Note your odometer reading at the start and end of each tax year.
2. Keep your app trip records and weekly statements, as they show your working miles.
3. Note any private trips, like the school run or a day out.
4. Keep receipts for parking, tolls and charges.
5. Keep everything for at least 5 years after the 31 January deadline for that tax year.

The free UK Driver Hub Earnings and Expenses tracker lets you log fares and costs as you go, so you can compare both methods with real figures instead of guessing in January.

If your income is over £50,000, you're already in Making Tax Digital, and that limit drops to £30,000 from April 2027. Read our Making Tax Digital guide for taxi drivers for what that means for your records.

Quick answers

Can I claim fuel on top of the mileage rate?

No. Fuel is already covered by the 55p and 25p rates. Claiming it again would be claiming twice.

I've used the mileage rate for years. Can I switch now?

Not for the same car. You can choose again when you replace it.

Does the mileage rate apply to my whole year's driving?

No, only business miles. Personal trips, like the school run or shopping, don't count.

Got a question about licensing or the trade?

Ask our free Legal & Industry Assistant.

General information only, not tax advice. For your own situation, speak to an accountant or HMRC. Rates and rules last checked October 2026.