Most self-employed people overpay on their car finance because they don’t know what HMRC lets them claim back.
You could be missing out on hundreds or thousands of pounds in tax relief every year. The rules aren’t always straightforward, and HMRC doesn’t exactly advertise what you’re entitled to.
At Business Awards UK, we celebrate and support small businesses across every sector. When we recognise successful entrepreneurs and growing companies, we often hear about the financial challenges they face along the way — especially around managing business expenses and maximising tax efficiency.
One area that frequently catches people out? Car finance. Whether you’re a sole trader making client visits, a company director with a fleet, or a freelancer juggling multiple sites, knowing what you can claim back on your car finance can save you thousands of pounds each year.
Before we dive in: Credit brokers Car Finance Plus have published a focused guide on claiming car finance on tax returns that covers the essentials if you need a quick reference. They specialise in helping self-employed individuals navigate both the finance and tax implications together.
Should You Finance the Car Personally or Through Your Company?
This decision affects everything that follows.
Sole Traders and Freelancers
You don’t have much choice here. As a sole trader, there’s no legal separation between you and your business, so the car will be financed in your personal name. That doesn’t mean you can’t claim tax relief on it though.
Company Directors
You have two options, each with different tax implications.
Personal finance: You own the car, pay for it yourself, and claim mileage back from your company. HMRC’s Approved Mileage Allowance Payments allow 45p per mile for the first 10,000 business miles, then 25p per mile after that. This rate is designed to cover everything: fuel, insurance, depreciation, and your finance payments.
Company finance: Your limited company owns the car and pays the monthly finance. You’ll likely face a Benefit-in-Kind (BIK) tax charge because HMRC views it as a perk. The company can claim more expenses directly, but you pay personal tax on the benefit.
The verdict? For most people, personal finance with mileage claims tends to work out better, especially if you do mixed personal and business driving. But if the car is used 90% or more for business, or it’s electric (which has low BIK rates), company ownership might come out ahead.
What You Can Actually Claim
The Simple Route: Mileage Allowance
This is what most self-employed people should consider using. According to HMRC’s simplified expenses guidance, you can claim:
- 45p per mile for the first 10,000 business miles each tax year
- 25p per mile after that
This rate covers everything: fuel, insurance, MOT, servicing, tyres, depreciation, and your car finance payments. You don’t claim the finance separately because it’s already included in the mileage rate.
The requirement? You need to keep a proper mileage log. HMRC expects records showing dates, destinations, purposes, and miles for every business journey. Apps like MileIQ or even a simple spreadsheet will do the job.
Real example: If you drive 12,000 business miles in a year, that’s £5,000 you can deduct from your taxable income (10,000 × 45p + 2,000 × 25p). For a higher-rate taxpayer, that saves you £2,000 in tax.
The Complicated Route: Actual Costs
Alternatively, you can claim a percentage of your actual car costs based on business use. This includes:
- Finance interest payments (not the capital repayment on HP)
- Fuel
- Insurance
- Servicing and repairs
- MOT and road tax
The calculation: If you drive 15,000 miles total and 10,000 are for business, that’s 67% business use. You can claim 67% of all those costs.
Why consider it? If you do high mileage in an expensive or electric car, actual costs might work out better than the standard mileage rate. However, it requires detailed record-keeping and separate calculations for every expense.
For most people? The mileage method is simpler. HMRC generally prefers it, and unless you’re doing 20,000+ business miles in a £40k+ car, it usually pays better anyway.
HP vs PCP: What’s the Difference for Tax?
The tax treatment of vehicle finance depends partly on the finance type.
Hire Purchase (HP): You’re buying the car on a loan. For sole traders using actual costs, you can claim the interest portion of your payments and potentially capital allowances on the car’s value. With the mileage rate? It’s already included.
Personal Contract Purchase (PCP): You’re essentially renting with an option to buy at the end. The same rules apply: interest is claimable under actual costs, or you can just use the mileage rate and not worry about the details.
Balloon payment at the end? If you pay it to keep the car, it’s a capital expense. You can’t deduct it directly, but it might qualify for capital allowances if you’re using the actual costs method.
Company Directors: The Limited Company Route
If your limited company finances the car, the tax picture changes significantly.
What the company can claim:
- 100% of finance payments (both interest and capital)
- 100% of fuel for business journeys
- Insurance, servicing, road tax, everything
What you pay personally:
- Benefit-in-Kind tax based on the car’s list price and CO2 emissions
- This can be substantial, often £2,000 to £5,000+ per year depending on the car
The electric car advantage: According to current BIK rates, EVs have a rate of just 3% for 2025/26, making company car ownership far more attractive. A £40,000 electric car means a BIK of just £1,200. As a 40% taxpayer, you’d pay £480 per year in tax (£40 per month). That’s remarkably low.
For petrol or diesel? Unless it’s a low-emission model or used almost exclusively for business, personal ownership with mileage claims usually works out better.
Capital Allowances: The Extra Boost
If you’re using the actual costs method (not mileage), you might also claim capital allowances, which is essentially tax relief on the car’s value.
For most cars, you get writing down allowances of 18% per year (for low-emission vehicles) or 6% (for others), depending on CO2 emissions. For brand-new electric cars, you can claim 100% first-year allowances, meaning you deduct the entire cost in year one.
Worth noting: this only applies if you’re claiming actual costs and the car is used for business. Most people using the simpler mileage rate won’t need to think about this.
The Records HMRC Wants to See
Audits aren’t common, but if HMRC does request records, here’s what they typically want.
For mileage claims:
- A log showing date, start and end location, purpose, and miles for every business journey
- Nothing fancy required: a spreadsheet or mileage app works fine
For actual costs:
- All receipts (fuel, insurance, finance statements, servicing)
- A clear calculation showing your business vs personal mileage percentage
- Your working to demonstrate how you split the costs
Red flags that can trigger questions:
- Claiming 100% business use (HMRC tends to be sceptical of this)
- Round numbers everywhere (can look estimated rather than actual)
- Large mileage claims without supporting documentation
What Should You Actually Do?
If you’re a sole trader or freelancer:
- Finance the car personally
- Track your business mileage carefully
- Claim 45p/25p per mile
- Keep it simple
If you’re a company director with a petrol or diesel car:
- Finance it personally
- Claim mileage from your company
- Avoid the BIK tax complication
If you’re a company director buying electric:
- Seriously consider company ownership
- The 3% BIK rate is very favourable
- Your company claims everything, and you pay minimal personal tax
If you do substantial business mileage (20,000+ miles):
- Run the numbers comparing actual costs vs mileage
- Consider getting an accountant to check which works better for you
Getting the Right Car Finance Deal
Once you’ve decided whether to finance personally or through your company, the next step is finding the right finance deal for your situation.
Business Awards UK recommends: If you’re looking for flexible car finance options with no deposit, Car Finance Plus works with a panel of over 15 lenders to find competitive rates for self-employed individuals and company directors. They specialise in finding deals even if you have a less-than-perfect credit history, and their soft search process won’t affect your credit score while you explore your options.
Whether you’re considering HP, PCP, or need advice on which structure works best for your tax situation, getting pre-approved can help you understand your budget before you start claiming tax relief.
Don’t Forget About VAT
If you’re VAT registered, you can reclaim VAT on:
- 50% of car finance payments (if it’s a mixed-use car)
- 100% on vans
- All business fuel (with proper mileage records)
This is separate from your income tax relief, so it’s additional money back.
Frequently Asked Questions
Can I claim car finance payments on my tax return? Yes, you can. If you use the mileage allowance method (45p/25p per mile), your finance payments are already included in that rate. If you use the actual costs method, you claim the interest portion of your payments.
What’s better for tax purposes: HP or PCP? For tax purposes, they’re treated quite similarly. The main difference is about ownership. HP means you own the car at the end of the agreement. PCP gives you the option to buy. Both allow you to claim either mileage or actual costs in the same way.
Do I need to keep every fuel receipt? Only if you’re claiming actual costs instead of mileage. With the standard mileage method, you just need a log of business journeys. The 45p/25p rate already covers fuel costs.
Can company directors claim 45p per mile? Yes, but only if you own the car personally. Your company can then reimburse you for business miles. If the company owns the car, you can’t claim personal mileage because the company is already paying all the running costs.
What happens if I forgot to log my mileage? Start logging now. HMRC may accept reasonable estimates if you have some supporting records, but you need something to base your claim on. Many people use calendar entries, client invoices, or receipts to reconstruct past business journeys.
Are electric cars genuinely better for tax? Generally, yes. The 3% BIK rate for company cars makes EVs particularly attractive. You also get 100% first-year capital allowances if you’re claiming actual costs. Combined with lower running costs overall, EVs often make strong financial sense.
Many self-employed people leave money on the table because they either don’t track their mileage properly or assume car finance isn’t claimable. It absolutely is. You just need to know which method works for you and keep the right records.
HMRC won’t proactively tell you what you can claim. But now you know what to look for.
Additional Resources:
Quick Reference Guide
For Sole Traders & Freelancers
Finance method: Personal car finance only
Tax relief options:
- Mileage method: 45p/mile (first 10,000 miles), 25p/mile after
- Actual costs method: Claim business-use percentage of interest, fuel, insurance, repairs
What to keep:
- Detailed mileage log (date, destination, purpose, miles)
- Finance agreement and statements
- All receipts if claiming actual costs
Best for most people: Mileage method (simpler, usually better value)
For Company Directors (Personal Finance)
Finance method: Car financed in your personal name
How it works:
- Your company reimburses you for business mileage
- Claim 45p/mile (first 10,000), 25p/mile after
- No Benefit-in-Kind tax to pay
What to keep:
- Mileage log for company reimbursement claims
- Records of payments received from company
Best for: Directors doing mixed personal/business driving
For Company Directors (Company Finance)
Finance method: Car financed through your limited company
How it works:
- Company claims 100% of finance payments, fuel, insurance, all costs
- You pay Benefit-in-Kind tax on the car’s value
- BIK rate depends on CO2 emissions (3% for EVs in 2025/26)
What to keep:
- Finance agreements in company name
- All receipts and invoices
- P11D forms for BIK reporting
Best for: High business use (90%+) or electric vehicles
Quick Comparison Table
| Sole Trader | Director (Personal) | Director (Company) | |
|---|---|---|---|
| Who owns car | You personally | You personally | Your company |
| Tax relief method | Mileage or actual costs | Mileage reimbursement | Company expenses |
| Mileage rate | 45p/25p per mile | 45p/25p per mile | N/A |
| BIK tax | No | No | Yes |
| Best for EVs | Maybe | Maybe | Yes (3% BIK) |
| Record keeping | Mileage log | Mileage log | All receipts + P11D |
| Simplicity | ⭐⭐⭐ | ⭐⭐⭐ | ⭐⭐ |
Key Rates for 2024/25
Mileage allowance:
- First 10,000 miles: 45p per mile
- After 10,000 miles: 25p per mile
Capital allowances (if using actual costs):
- Low-emission cars: 18% per year
- High-emission cars: 6% per year
- New electric cars: 100% first year
Benefit-in-Kind rates:
- Electric vehicles: 3% (2025/26)
- Hybrid vehicles: 5–14% (depending on electric range)
- Petrol/diesel: 15–37% (depending on CO2 emissions)
VAT (if VAT registered):
- Mixed-use car finance: 50% reclaimable
- Vans: 100% reclaimable
- Business fuel: 100% reclaimable (with mileage log)
Important Disclaimer
This article is for informational purposes only and does not constitute financial, tax, or legal advice.
Tax rules and regulations change regularly, and everyone’s situation is different. The information provided here is based on current UK tax law as of 2025, but your personal circumstances may affect how these rules apply to you.
For accurate, personalised advice, you should consult:
- A qualified accountant – ideally one who specialises in self-employed tax returns or small business accounting. They can review your specific situation and ensure you’re claiming correctly.
- A chartered tax adviser – Members of the Chartered Institute of Taxation (CIOT) can provide specialist tax advice tailored to your circumstances.
- HMRC directly – For clarification on specific tax rules, you can contact HMRC’s self-assessment helpline or use their online guidance.
Business Awards UK provides this information to help you understand your options, but we strongly recommend professional guidance before making any tax-related decisions. Every business is unique, and what works for one person may not be the optimal approach for another.
