How does mileage allowance affect tax?

scaredofdebt

I'm looking to start a self-employed role that involves a lot of driving.  I've read that I need to do self-assessment and can claim 45p a mile for the first 10k miles and then 25p a mile after that, but how does that actually affect my tax?

Can I lease a car with a business rate and not pay VAT on it?  I'm likely to do 40k miles a year so I am paying a lot of fuel duty!

Turnover in year 1 is likely to be £35k or so.

Thanks for advice.

Grumpy_chap

Some parts of the question will vary depending on whether you are self-employed sole trader or Ltd Co.

If turnover will only be £35k, it's permitted not to be VAT registered.  Will you be registering for other reasons?

scaredofdebt

I was thinking of registering so I can get a business lease on a vehicle to save the 20% VAT. 

So if you do self-assessment how does the mileage allowance affect the tax payable?

Jeremy535897

If your customers will mostly be VAT registered, it would probably make sense for you to register voluntarily.

Self employed individuals have 2 choices when it comes to claiming motor expenses:

• the mileage allowance as you describe. You should keep a log to establish business, as opposed to private, mileage
• claim the business proportion of the actual motor expenses (lease costs, although there are limits depending on emissions, fuel, repairs, licence, insurance, roadside recovery etc)

If you drive 40,000 business miles a year, you would claim (if using mileage allowance) 45p x 10,000 + 25p x 30,000 =£12,000 motor expenses in a tax year. It looks like you will be a basic rate taxpayer, so this claim would potentially be worth £12,000 x 29% (20% basic rate tax plus 9% Class 4 NIC) = £3,480.

Grumpy_chap

Will you be self employed sole trader or Ltd Co?
Will you have any personal use of the vehicle?

scaredofdebt

I'm going to go sole trader as turnover is only likely to be about £35k and it's my own car.

So if I do 50k miles for business that's £14,500 off my tax liability )(45p x 10,000 + 25p x 40,000).  If I earn £35k then does that mean instead of being liable for tax on £35,000 - £12,500 (allowance)  = £22,500

I am then liable for tax on £35,000 - £12,500 - £14,500 = £8,000?

Is that how it works?

Jeremy535897

The mileage allowance reduces your taxable profit, like any other business expense. Your taxable profit is turnover less business expenses. Assuming you have no other income, you can then set your personal allowance against your taxable profit. Say your other expenses were £1,000. You would pay tax at basic rate on turnover £35,000 - mileage £14,500 - other expenses £1,000 - personal allowance £12,500 = £7,000 at 20% = £1,400. You would pay class 4 NIC on £35,000 - £14,500 -£1,000 - £9,500 class 4 deduction = £10,000 at 9% = £900. You would also pay class 2 NIC of £158.60. Total tax and NIC would be £2,458.60.