Tax for taxi drivers explained
As a taxi driver, income tax may be a confusing topic. How much should you pay, and how do you go about it? Find out with our dedicated guide
Tax can be an intimidating subject to tackle – but don't let this stop you from starting your own taxi business. And while you might have looked at other online resources on tax already, they can be difficult to understand. What is the key information that you need to know about paying tax as a taxi driver?
Thankfully, this is where our guide to tax for taxi drivers steps in. We’ll cover the main points, such as how much you can expect to pay, along with the expenses and allowances you’re permitted to have.
How much tax does a taxi driver pay in the UK?
As a taxi driver in the UK, you’ll be taxed on both your income and your car. The factors that influence the cost of your final tax bill include the amount of profit you make, as well as the type of vehicle you have.
Taxi driver income tax
If you’re self-employed as a ‘sole trader’ with earnings of £1,000 or more, or if you’re a partner in a business partnership, then you’ll have to complete a self assessment tax return for the relevant tax year.
The amount of income tax you'll pay is determined by how much weekly or monthly profit you make, as well as class 2 and class 4 National Insurance contributions.
If you’re self-employed, you can use the Gov.uk self assessment tax bill tool to work out how much you might need to pay.
Note that for the 2019/20 tax year, the tax free allowance is £12,500 – the same as the personal tax allowance. This figure refers to the amount you can earn before income tax applies.
Remember that the tax bands are incremental, and that you don’t pay any tax on the tax free allowance, which is £12,500 in the 2019/20 tax year.
The basic rate (20%) then applies for profit between the next two bands, and then the higher rate (40%) applies for the amount that falls into the next tax band, and so on. Visit the Gov.uk page on income tax rates to find out more.
Source: Money Advice Service
If you’re based in Scotland, different rules apply: find out more about income tax in Scotland here.
What is Vehicle Excise Duty?
Commonly referred to as ‘road tax’, Vehicle Excise Duty (VED) is the official name for the tax you pay for your vehicle. It’s based upon the amount of emissions generated by your vehicle.
Vehicles must be taxed even if you’re not required to pay because of an exemption, e.g. electric vehicles. This means that you still need to complete the process to tax your vehicle, but it won’t cost you anything. Visit the Gov.uk site to learn more about vehicle tax exemptions.
You must also meet the legal obligations for drivers, such as ensuring that you have the correct licence.
To pay vehicle tax, you’ll need a reference number from:
- A recent reminder or last chance letter
- A vehicle log book in your name
- A green ‘new keeper’ slip (if the vehicle is recently purchased)
How much is VED?
The amount you’ll pay depends on several factors, including:
- Vehicle type
- Registration date
- Engine size
- Fuel type (e.g. petrol, diesel)
- CO2 emissions (for cars, and depending on vehicle registration date)
Diesel cars that don’t meet the Real Driving Emissions 2 (RDE2) standard are charged more.
You can use the Gov.uk vehicle tax rates calculator to help find out how much you’ll need to pay.
Note that in April 2020, rules around this are changing with regards to how the emissions are measured. This will be based on the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).
This applies to the first VED payment you make when you purchase and register a new vehicle after 1 April 2020. There will also be changes to Benefit in Kind for company cars from 6 April 2020 onwards.
How does it work?
To pay tax, you'll need to make a payment, which covers your car for 12 months. The amount could range anywhere from £0 for cars without any emissions, through to £2,135 for cars with emissions of more than 255g/km.
After this, the rates for second tax payments apply. This comes to £145 for petrol or diesel fuel types, and is paid in a single payment to cover the 12 months.
For other fuel types, and to find out about the other criteria, visit the Gov.uk Vehicle Tax Rate Tables page.
Allowable tax expenses for taxi drivers
There are several ways of claiming tax expenses as a taxi driver, including for mileage, for your vehicle, as well as for other common outgoings. This refers to some of the costs to run your business, and you can take away certain costs from the amount of profit that you’re taxed on.
Claim for mileage
When using your own car, you can claim for the mileage you rack up. In order to do this, you’ll need to keep a record of miles driven. The amount you can claim is 45p per mile for the first 10,000 miles, and then 25p per mile for 10,001+ miles. Learn more about simplified expenses for vehicles if you’re self-employed with the Gov.uk guide.
Remember that if you also use your taxi vehicle for personal use, then you’ll need to calculate this usage exactly and deduct it from any business expenses that you may claim for.
If you do decide to opt for mileage claims, this means you can’t also claim for vehicle, servicing, or insurance costs.
Claim for the vehicle
Alternatively, if applicable, you can claim for car leasing costs. In this instance, you can then also claim costs for fuel, service, insurance, and repairs. Similarly, you can also claim if you buy a new car, which includes the option to claim for services and insurance.
Some of the most common allowable expenses for taxi drivers include:
- Fuel costs
- Road tax (VED)
- Licence/registration fees
- Vehicle insurance
- Loan interest for buying a taxi
- AA/RAC membership fees
- Business phone bills
Taxi Driver Capital Allowances
If you purchase a car for driving as a taxi, you may be able to get tax relief based on the amount paid for the car. This is offered as a portion of the cost of the car in a tax year, and it depends on the amount of emissions created by the car.
The capital allowance is 18% per year. In some instances (e.g. vehicles with low level emissions), it may even be possible to claim a 100% allowance.
How do taxi drivers pay tax?
In order to complete your tax return, you’ll need to keep business records of income, sales and tax, and more. Ideally, you should keep records for six years. These can be on paper, in spreadsheet form, or you can use specialist software.
You’ll need to register within three months of setting up your business, or you could face a fine of up to £100.
Tax returns can be done on the HMRC website. To complete one, you’ll need to provide information about yourself and your business – this will include personal and contact details, as well as your National Insurance number.
If you’re registering for the first time, then you’ll need to provide details about your self-employed work.
Once you’ve completed this process, you’ll receive confirmation from HMRC, and a Unique Taxpayers Reference (UTR). If you need to contact HMRC, you’ll need to quote your UTR.
A tax return is based on your income for the tax year, 6 April 2018 to 5 April 2019. All income needs to be included on the tax return, including that which is considered taxed at source.
Tax return deadlines
There are various deadlines in the tax return process – here, we highlight some of the most common dates to know about.
|31 October||Paper returns|
|31 January||Online returns|
31 January is also the deadline for paying a tax installment for the next tax year. This may apply to you if the amount of tax you need to pay is above £1,000, or if the majority of your income isn’t taxed at source.
For tax returns that are up to three months late, the fine is £100. Additional penalties may apply for further delays.
Business case study: Abi Hussain, transport manager at Cabzilla
We interviewed Abi Hussain from Cabzilla about how to pay tax as a taxi driver.
How would you describe the process of paying tax as a taxi driver?
“Although it can seem like a daunting task, paying tax as a taxi driver doesn’t have to be scary. Through many (many!) years of trial and error, I’ve found that keeping a simple, but up-to-date, log of all my tips and fares is the best way to stay on track.
“After notifying HMRC that you need to complete a tax return, you will receive confirmation of your registration and a Unique Taxpayer Reference. This number is important: you will need it for any correspondence with HMRC and to make any payments towards your tax bill – keep it safe!
“As a self-assessment taxpayer, you are required to report on every penny you earn over the specified tax year. This includes income from your job as a taxi driver, any other employment, income from properties you may own, as well as interest from any savings and investments you might have.
“Your final tax return must be filled by 31 January of the following year. So if you’re submitting your tax return digitally, your return for the year 2019/20 must be fully completed by 31 January 2021, or by 31 October 2020 if you are completing an on-paper tax return. Missing the deadline will incur a fine of £100.”
What top tips/advice would you offer to other taxi drivers when paying tax?
“When I first started out as a driver, paying tax was a complicated process. These days, handy apps like QuickBooks are changing that – make use of them!
“I found that managing my fares, tips and receipts on a daily basis is the best way to keep on top of things. Keeping a simple log of money in and out, as well as a comprehensive list of expenses and receipts for each day may sound like a lot of work, but when it comes to the end of the week, it's simply a case of collating the data you’ve collected throughout the week.
“It is also important to remember you can claim tax relief on any costs associated with running your vehicle. This includes the obvious stuff like fuel, private hire taxi (PVH) insurance and road tax, as well as some things you would never think were tax deductible like advertising costs, cleaning and even car parking charges! It’s always worth doing your research – I have many taxi-driving friends who have, in the past, overpaid by hundreds of pounds!”
In this guide, we’ve offered you clear, concise information on how to navigate the tax return process as a taxi driver. We’ve covered key details like how to submit a tax return, as well as offering insight into how much you can expect to pay, and where to find more information.
Essentially, remember to keep records, as well as to check the dates and tax bands that may apply to you.
If you need other assistance with bookkeeping and financial management, check out our guide to merchant service providers.