UK taxi drivers: when 55p mileage loses to actual costs under MTD

Most UK taxi drivers start with the simplified mileage method because it is the easiest to run day to day, but it is not automatically the cheapest option. Two lawful routes exist: simplified mileage (the AMAP rates) or claiming actual running costs plus capital allowances. Drivers with a newer or more expensive vehicle should model both before choosing, and if your vehicle is used primarily for taxi hire, you may also be able to recover VAT, which changes the sums again. From 2026, Making Tax Digital adds a further layer: how you keep records now affects how easily you file later.

TL;DR:

• The simplified mileage method sets a flat rate of 55p per mile for the first 10,000 miles and 25p afterward, but it may become less advantageous if actual costs exceed these figures.
• Claiming actual costs involves detailed recordkeeping of fuel, insurance, repairs, VED, and capital allowances, which can be more profitable for newer or higher-value vehicles.
• VAT recovery on vehicle purchases is possible if the car is mainly used for hire, but drivers must keep detailed evidence of usage patterns to justify VAT claims.
• With upcoming Making Tax Digital requirements, drivers must adopt digital recordkeeping and use compatible software, especially as thresholds reduce to bring more into scope by April 2028.
• Accurate, ongoing documentation and digital habits—such as separate business accounts and logging journey details—are essential for compliance and maximizing tax benefits.

Table of Contents

• Comparing simplified mileage against actual costs and capital allowances
• VAT on your taxi vehicle and how it affects fares
• Making Tax Digital and recordkeeping: what to log and which software helps
• Deciding and implementing the right method for your taxi accounts
• What corporate clients expect on a taxi invoice
• Pooled taxi expenses in shared business use scenarios
• How recent tax law changes affect your choice between methods
• Seasoned driver checklist: three rules to follow every week
• Authoritative GOV.UK guidance and HMRC pages to read next
• Airport Lift UK for drivers who need reliable transfer partners
• Sources
• FAQ

Comparing simplified mileage against actual costs and capital allowances

The simplified mileage method lets you claim a flat rate per business mile instead of tracking every fuel receipt and repair invoice. For 2026 to 2027, HMRC’s guidance sets the rate at 55p for the first 10,000 business miles in the year, dropping to 25p after that, and this covers fuel, servicing, insurance, repairs and depreciation in one figure, so you cannot claim any of those separately once you have chosen it, according to HMRC’s simplified mileage guidance.

The actual costs method works differently. You total every genuine running cost across the tax year and claim capital allowances on the vehicle itself, which suits drivers whose true costs run higher than the flat rate would allow. This includes:

1. Fuel, recorded from receipts that match your mileage log.
2. Insurance and MOT, including any taxi-specific cover you hold.
3. Servicing and repairs, kept as dated invoices.
4. Vehicle Excise Duty (VED), the annual road tax charge.
5. Capital allowances, which spread the cost of the vehicle itself over several years.

The catch is administrative. Actual costs demand a full paper trail for every category, whereas mileage only needs a log of business miles driven. There is also a lock-in rule worth knowing before you commit: once you elect simplified mileage for a specific vehicle, you must keep using it for that vehicle until you replace it, as confirmed in HMRC’s internal manual. Swapping methods mid-ownership is not permitted.

A small mileage difference can tip the balance between methods. HMRC’s 2026 to 2027 mileage guidance sets the first-10,000-mile rate at 55p, so a driver covering 15,000 business miles claims £5,500 for the first 10,000 miles plus £1,250 for the remaining 5,000, giving £6,750 under simplified mileage. If that same driver’s actual fuel, insurance, servicing, VED and capital allowances add up to more than £6,750, actual costs pays more, and the only way to know is to run both calculations side by side before you file.

Accountants who work with taxi drivers generally observe that older or lower-value cars tend to suit the mileage method, while newer or more expensive vehicles often come out ahead on actual costs once capital allowances are factored in, according to Livingstones Accountants. That pattern is a starting point, not a rule, so a worked comparison for your own mileage and running costs is worth doing before you commit either way.

VAT on your taxi vehicle and how it affects fares

VAT is where taxi drivers most often trip up, largely because the normal rules for buying a car do not apply in the same way. Ordinarily, input VAT on a car purchase cannot be reclaimed, but taxis and self-drive hire vehicles are a recognised exception. If you buy a vehicle primarily to carry fare-paying passengers, you may be able to recover the VAT charged on the purchase, provided you can demonstrate that primary business use, as set out in HMRC’s Notice 700/64 on motoring expenses. The evidence bar matters here: HMRC expects records that show the vehicle’s actual use pattern, not just an assertion that it is a taxi.

Fares themselves are normally standard-rated for VAT purposes, which means VAT-registered drivers need to account for VAT on the fares they charge once they are above the registration threshold. Account work introduces a further wrinkle: whether you act as an agent (simply passing a fare through to a taxi firm) or as a principal (contracting directly with the corporate client) changes who is responsible for accounting for the VAT, according to GOV.UK’s Notice 700/25 on taxis and private hire cars. Corporate account work, of the kind Airport Lift invoices monthly, tends to sit more clearly on one side of that line than casual cash fares, so it is worth checking your contract terms rather than assuming.

A few practical points follow from this:

• Keep purchase paperwork for the vehicle showing it was bought primarily for hire work, in case HMRC asks you to justify a VAT reclaim.
• Track any private use of the vehicle separately, since mixed business and personal use can affect both VAT and income tax claims.
• Understand fuel scale charges if you reclaim VAT on fuel but also use the vehicle privately, as this adjusts your VAT liability to reflect non-business mileage.
• Confirm your agent or principal status in writing with any account client, since this determines who accounts for VAT on that fare.

Making Tax Digital and recordkeeping: what to log and which software helps

Making Tax Digital for Income Tax changes how qualifying self-employed drivers must keep records, and the threshold has been moving downward. GOV.UK’s guidance on Making Tax Digital for Income Tax sets out who must comply and when, based on qualifying income, and a further threshold reduction is planned to bring more sole traders into scope by April 2028, according to the government’s mandation threshold publication. Once you are within scope, you need MTD-compatible software and must send quarterly updates rather than a single annual return.

In practice, this means digitising habits many drivers already have on paper. HMRC expects records to show, at minimum:

• The date of each journey or expense.
• A category for the entry (fuel, fare income, repairs, insurance).
• The amount involved, matched to a receipt or invoice.
• Journey details where relevant, such as start and end points for business mileage claims.

Acceptable evidence includes fuel receipts, garage invoices, MOT certificates and booking vouchers from account work. Bank statements alone rarely satisfy HMRC that a cost was “wholly and exclusively” for business, since they show a payment happened but not what it was for, according to GOV.UK’s guidance on expenses and benefits.

Pro Tip: Open a separate business bank account and a dedicated card for fuel and running costs; it turns your bank statement into a usable expense log instead of a guessing exercise.

Tools that link booking data directly to your accounts, such as Halen, can reduce the manual work of moving journey and invoice details into MTD-compatible software, which matters more as quarterly reporting becomes the norm.

Deciding and implementing the right method for your taxi accounts

Getting the method right is a one-off decision with lasting consequences, so it is worth working through it properly rather than defaulting to whatever feels simplest on day one.

1. Forecast your annual business mileage and estimate your actual running costs for the same period.
2. Check your VAT position, including whether your vehicle qualifies for input VAT recovery as a taxi.
3. Choose your method and document the decision, noting the date and the vehicle it applies to, since this cannot be reversed for that vehicle.
4. Set up digital records and a separate business bank account before your next quarterly update is due.

Track the following fields for every journey and expense, whichever method you choose:

Common mistakes include mixing personal and business spending in one account, switching methods on a vehicle mid-ownership, and losing booking vouchers for account work. Any of these can trigger closer HMRC scrutiny if your claimed expenses look inconsistent with your declared mileage or income.

What corporate clients expect on a taxi invoice

Corporate account customers set a higher bar for invoicing than cash fares, and meeting it consistently tends to win repeat business. Airport Lift runs fixed-price transfers with licensed, DBS-checked drivers, flight tracking and meet-and-greet options, and its corporate account customers expect invoices that reflect that level of detail rather than a bare total.

A workable invoice format for account work includes:

• The date and time of the journey.
• Pickup and drop-off locations, matched to the booking reference.
• A journey or booking code the client can reconcile against their own records.
• A VAT breakdown where the driver or firm is VAT-registered.

Corporate billing research suggests that clients value clear journey detail and VAT transparency because it speeds up their own reconciliation process, according to Yelowsoft’s corporate billing features. Drivers who want to see this in practice can review Airport Lift’s corporate accounts page as a working example of the format.

Pooled taxi expenses in shared business use scenarios

Shared vehicle arrangements are common among owner-drivers who rent out a car to another driver during off-shifts, or among small firms running a pooled fleet. The tax treatment gets more complicated here because HMRC’s tests for “wholly and exclusively” business use and for VAT recovery both depend on who is actually using the vehicle and for what purpose at any given time.

If a vehicle is shared between two self-employed drivers, each driver generally needs to keep their own mileage and expense records for the periods they used it, rather than relying on a single combined log. Claiming simplified mileage against miles someone else drove is not supportable, and HMRC’s documentary evidence standard applies equally to each driver’s share, in line with the general expectation set out in GOV.UK’s guidance on expenses and benefits.

VAT recovery on a pooled vehicle depends on the same primary-use test that applies to any taxi vehicle: if the car is genuinely used primarily for hire work across its pooled users, the qualifying test in HMRC’s Notice 700/64 can still be met, but the evidence needs to reflect combined usage patterns, not just one driver’s claim. Where a limited company or partnership owns the pooled vehicle, capital allowances and running costs are usually claimed at the business level rather than by individual drivers, which changes how the figures flow into each driver’s own tax return. Getting this wrong, particularly on VAT, is a common source of HMRC enquiries into shared-vehicle arrangements.

How recent tax law changes affect your choice between methods

The most significant recent change for taxi drivers is the tightening of Making Tax Digital thresholds. The planned reduction of the mandation threshold to £20,000 from April 2028 means a much wider group of self-employed drivers will need MTD-compatible software and quarterly digital updates, according to GOV.UK’s mandation threshold publication. This does not change whether mileage or actual costs pays more, but it does raise the practical cost of running actual costs badly, since every receipt now needs to sit in a digital record rather than a shoebox.

Mileage rates themselves are also reviewed and adjusted by HMRC periodically, and the 2026 to 2027 rates confirm 55p for the first 10,000 business miles and 25p thereafter, as set out in HMRC’s internal manual. Because the lock-in rule ties you to your chosen method for the life of the vehicle, a rate change mid-ownership does not let you switch, it only changes how much your existing method is worth each year. That makes it worth re-running your comparison whenever HMRC updates the rates, even if you are not planning to change vehicles, simply to confirm your current method still makes sense.

For VAT-registered drivers, no recent change has altered the core qualifying test for reclaiming VAT on a taxi vehicle, but the wider MTD push means VAT records increasingly need to sit in the same digital system as your income tax records, rather than as a separate paper file.

Seasoned driver checklist: three rules to follow every week

Keep a dedicated business bank account and a separate card for fuel, repairs and running costs, so your statement doubles as an expense log without extra work. Export your journey log weekly rather than leaving it until year end, when memory and receipts both fade. Keep every booking voucher for account work, since HMRC and corporate clients both expect it as primary evidence. If you are VAT-registered or planning a vehicle purchase, talk to an accountant before switching methods, since the lock-in rule leaves no room to correct a wrong call later.

— AirportLift

Authoritative GOV.UK guidance and HMRC pages to read next

Check simplified expenses for vehicles and VAT on motoring expenses before filing or reclaiming VAT.

Airport Lift UK for drivers who need reliable transfer partners

If you are a taxi driver weighing up mileage against actual costs, chances are you are also thinking about where your business comes from. Airport Lift UK runs fixed-price airport, seaport and resort transfers across Nottinghamshire and Derbyshire, with licensed, DBS-checked drivers, flight tracking and meet-and-greet as standard.

For drivers or small firms looking to take on account work, our corporate accounts service shows what a working invoice and booking relationship looks like in practice, the kind of clear, VAT-transparent record this article has been describing. Browse our airport transfer routes to see fixed prices from £35, or get in touch about setting up a corporate account for regular journeys.

This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

Sources

• Gov
• Taxi driver allowable expenses — what you can and can’t claim - Livingstones Accountants

FAQ

What is the new HMRC law for taxi drivers?

There is no single new law specific to taxi drivers, but Making Tax Digital for Income Tax is expanding, with the mandation threshold falling to £20,000 from April 2028 according to GOV.UK. This brings more self-employed drivers into scope for digital record-keeping and quarterly updates.

Is owning a taxi business profitable?

Profitability depends on running costs, fare income and how efficiently you manage expenses and tax claims, so no single figure applies to every driver or area. Choosing the right expense method and keeping clean digital records, as this guide sets out, directly affects how much of your fare income you keep.

What is the current rate of taxi tax in the UK?

There is no separate “taxi tax.” Taxi drivers pay Income Tax and, where applicable, VAT on fares under the same rules as other self-employed people, with the simplified mileage rate for 2026 to 2027 set at 55p for the first 10,000 business miles and 25p after that, according to HMRC.

Are Uber taxis cheaper in the UK?

Pricing varies by operator, distance, time of day and local market conditions, so a direct comparison is not meaningful. Airport Lift, by contrast, offers fixed prices agreed at the time of booking, with no surge pricing or hidden fees.

Can I claim VAT back on my taxi vehicle?

You may be able to reclaim input VAT on a vehicle bought primarily for taxi or self-drive hire work, provided you can evidence that primary business use, as set out in HMRC’s Notice 700/64. This is an exception to the general rule that VAT on car purchases cannot be reclaimed.