Everything You Need to Know About Car Expenses and Tax Relief in the UK

For many business owners, a car is more than just transport — it’s an essential tool for running your business. But when it comes to claiming car expenses and tax relief, things can quickly get confusing.

At Jarem Accountancy Services Limited, we help business owners make sense of what they can (and can’t) claim when it comes to vehicles — whether you’re a sole trader, limited company, or director using your car for work.

Here’s a straightforward guide to help you understand how it all works.

🚗 1. Claiming Car Expenses as a Sole Trader or Partnership

If you’re self-employed, you can claim tax relief on the business use of your car. There are two main ways to do this:

A. Simplified Mileage Method

You can claim a flat rate per business mile travelled:

• 45p per mile for the first 10,000 miles per annum
  
• 25p per mile thereafter
  

This method is simple and avoids the need to track every cost related to the car (fuel, insurance, repairs, etc.). Just make sure you keep an accurate mileage log.

B. Actual Cost Method

Alternatively, you can claim a proportion of your actual running costs, including:

• Fuel
  
• Insurance
  
• Servicing and MOT
  
• Repairs
  
• Road tax and breakdown cover
  
• Lease or finance payments (if applicable)
  

If you use your car for both business and personal journeys, you can only claim the business-use percentage. For example, if 60% of your mileage is for business, you can claim 60% of your total car expenses.

🏢 2. Car Expenses for Limited Company Directors

If you run a limited company, the rules are different — especially when it comes to whether the company owns the car or you use your personal vehicle.

A. Using Your Personal Car for Business

If you use your own car for business journeys, your company can reimburse you at HMRC’s approved mileage rates (the same 45p/25p rates as above). These payments are:

• Tax-free for you
  
• Tax-deductible for the company
  

This is usually the simplest and most tax-efficient option for most directors.

B. Having a Company Car

If the company buys or leases the car, it can claim:

• Capital allowances (a form of tax relief on the purchase cost)
  
• Running costs such as insurance, maintenance, and road tax
  

However, there’s a catch:
If you use the company car for personal journeys (including commuting), it becomes a Benefit in Kind (BIK) — meaning you’ll pay personal tax on it, and the company will also pay Class 1A National Insurance.

The amount of BIK tax depends on the car’s list price and CO₂ emissions — so low-emission and electric vehicles tend to be far more tax-efficient.

⚡ 3. Electric Cars and Tax Relief

Electric vehicles (EVs) are now a popular choice for business owners thanks to generous tax incentives.

For Limited Companies:

• 100% First-Year Allowance (FYA) is available for new, fully electric cars — meaning your company can deduct the entire cost from profits before tax.
  
• EVs also have very low BIK rates (currently around 2%), making them a smart choice for directors.
  

For Sole Traders:

• You can still claim mileage (at 45p/25p) or a proportion of running costs, depending on your method.
  

And don’t forget — charging costs at home or at the business can often be claimed too, depending on how and where the electricity is used.

🧾 4. VAT on Car Expenses

If you’re VAT-registered, you may be able to reclaim VAT on car expenses — but only if the car is used solely for business purposes (which is rare).

Most business owners instead reclaim VAT on:

• Fuel (using the fuel scale charge if there’s private use)
  
• Repairs and maintenance
  
• Lease payments (usually 50% reclaimable if there’s private use)
  

The VAT rules can be complex, so it’s best to discuss your situation with your accountant to avoid errors.

💡 5. Record-Keeping Is Key

HMRC expects clear and accurate records to support any car expense claims. Keep:

• Mileage logs (with dates, destinations, and purpose of trips)
  
• Fuel receipts
  
• Lease or purchase agreements
  
• Service and repair invoices
  

Cloud accounting software and mileage-tracking apps can make this much easier — and Jarem Accountancy Services can help you set these up for accurate, compliant reporting.

🚘 The Bottom Line

Car expenses and tax relief are valuable opportunities to reduce your tax bill — but they depend heavily on your business structure, how the car is used, and whether it’s owned personally or by your company.

The rules are detailed, and mistakes can lead to unexpected tax bills or missed savings.

At Jarem we help business owners structure their car ownership and expenses in the most tax-efficient way — ensuring compliance while maximising reliefs.

📞 Get in touch today to discuss your vehicle expenses and find the most efficient setup for your business.