Tax Allowances A Sole Trader Can Claim While Buying or Leasing A Vehicle

If you are self-employed, using a car for business purposes is, in many cases, unavoidable. Whether it is visiting clients, picking up materials, delivering goods, or traveling between locations, using a car for business is a reality. The good news is that HMRC has introduced a number of schemes that will help you reduce your tax liability on car expenses. In this article, we will explore the various tax allowances available to sole traders in the 2025/26 tax year.

Mileage Allowance (Simplified Expenses)

The most straightforward option for sole traders is the HMRC Approved Mileage Allowance Payments (AMAP) scheme. This scheme allows you to claim a flat rate for each business mile driven. The rates have remained unchanged for over 13 years and are still the same for 2025/26:

Cars and vans: 45p per mile for the first 10,000 business miles in a tax year, then 25p per mile afterwards.
Motorcycles: 24p per mile, regardless of total mileage.

Passengers: If you carry a fellow worker or employee on a business journey, you can claim an additional 5p per mile per passenger on top of your standard rate.

To show you how much you can claim: if you travel 15,000 business miles in the year, your total claim will be £5,750 — that’s 10,000 miles at 45p (£4,500) plus 5,000 miles at 25p (£1,250). Then multiply that saving by your Income Tax rate and the advantage becomes apparent.

You can also claim separately for other business travel expenses such as train tickets, bus fares, and taxis, provided the journey is wholly and exclusively for business.

Important restrictions: You cannot claim mileage relief if you have already claimed capital allowances on the same vehicle. You also cannot claim mileage relief for ordinary commuting to a fixed place of business. Once you elect to use simplified mileage relief on a vehicle, you must continue to use it for as long as you own that vehicle.

Outright Purchase – Capital Allowances

When you purchase a car outright, you cannot claim the entire amount as a relief in the year of purchase (as opposed to most other business assets, cars are not eligible for Annual Investment Allowance or Full Expensing). Instead, you can claim capital allowances on the vehicle over a period of time, based on the car’s CO₂ emissions:

Zero-emission electric cars: 100% First Year Allowance (FYA) – you can claim the entire purchase cost in the first year. This favorable treatment is currently extended until 5 April 2026 for Income Tax purposes, making it a good time for sole traders to consider purchasing an electric car.

Cars with CO2 emissions of 1-50g/km: 18% writing down allowance per annum on a reducing balance basis, assigned to the main pool.

Cars with CO2 emissions above 50g/km: 6% writing down allowance per annum, assigned to the special rate pool.

As most sole traders also use their car for private purposes, you will need to limit your capital allowances claim to reflect only the business use of the vehicle. For instance, if you use your car for 70% business purposes, you will be able to claim only 70% of the available allowance.

Hire Purchase

A car purchased under a Hire Purchase (HP) agreement is treated the same way as an outright purchase. HMRC treats you as the beneficial owner from the start of the HP agreement, and as such, capital allowances are calculated on the total cost of the vehicle, and not on the monthly payments. The interest charged on the HP agreement is a separate deductible business expense.

The same CO2 thresholds apply: zero-emission cars receive 100% FYA, cars with up to 50g/km CO2 emissions receive 18%, and those with over 50g/km CO2 emissions receive 6% per annum. Once more, private use must be considered if you are a sole trader and use the car partly for business and partly for private trips.

Contract Hire (Operating Lease)

With a standard contract hire arrangement, you will never own the car, as this will be retained by the finance company. This automatically means that you will not be able to claim capital allowances. However, you can claim a deduction for the lease payments as a business expense, subject to two important conditions:

CO2 emissions below 50g/km: You can claim 100% of the business-use part of your lease payments.

CO2 emissions above 50g/km: A 15% disallowance applies to the lease rental before calculating your business-use part. For example, if your annual lease payment is £6,000 and you use the car for business 80% of the time, you would first apply the 15% restriction, leaving you with a deduction of £5,100, and then claim 80% of this amount, which would be £4,080.

This is intended to restrict tax relief on high-emitting cars and is another reason why electric or low-emission cars may be more financially advantageous for self-employed individuals.

Personal Contract Purchase (PCP)

The tax treatment of a PCP arrangement will depend on the details of the arrangement. If the arrangement is sufficiently indicative of your intention to acquire the car at the end of the agreement, such as if the final “balloon payment” is significantly set below market value, HMRC may treat it as a hire purchase, in which case capital allowances will be available on the full purchase price.

However, most PCP agreements require the final balloon payment to be around the expected residual value of the car, giving you a genuine option to purchase the car or return it to the dealer. In this case, HMRC will likely treat the arrangement as a contract hire, and you will only be able to claim the monthly payments (subject to the CO2 restriction above if applicable).

The Electric Vehicle Advantage

Whichever method of acquisition you choose, at the moment the most tax-efficient solution for sole traders is offered by zero-emission electric vehicles. The 100% First Year Allowance for electric vehicles purchased outright or on HP means that you can claim 100% of the cost against your profits in the first year, which is a major cash flow benefit. In addition, the BIK rates for electric vehicles are currently the lowest of any vehicle type, making the tax environment very friendly towards EVs until the April 2026 deadline, after which some of these rates will be reviewed.

From April 2025, electric vans will no longer be exempt from Vehicle Excise Duty and will pay the standard rate of £345 per year.

Picking the Best Approach

There isn’t a “best” approach that suits everyone, and the best option for you will depend on your annual mileage, the CO₂ emissions of the vehicle, the amount of your business use that is genuinely business use, and your cash flow preferences. As a general guideline, sole traders with lower business mileage will probably find the simplified mileage rate most beneficial, while those investing in a vehicle that is used for business purposes, and preferably an electric vehicle, may find capital allowances more lucrative.

One thing to remember, however, is that Making Tax Digital for Income Tax is due to come into force from April 2026 for sole traders with qualifying income above £50,000.

Maintaining good digital records of all vehicle expenses and mileage will be crucial for sole traders who are affected by this new system.

If you are unsure which option will work best for you, consulting an accountant before investing in a vehicle or leasing one could save you far more than the cost of the advice.