Tax for taxi drivers explained – the in-depth guide

The thrill of the open road, the freedom to set your own hours, the buzz of never knowing where your next job might take you – it’s easy to see why, at the last count, the UK had just under 365,000 taxi or private hire drivers.

However, that freedom means it can be difficult to get your head around paying tax as a taxi driver – especially as online tax guides don’t tend to cover this subject in much detail.

If you’re confused though, help is at hand. Our comprehensive guide to tax for taxi drivers will give you key information like how much income tax you can expect to pay, how road tax affects taxi drivers, and the expenses and allowances you can use to reduce your tax bill.

How much tax does a taxi driver pay in the UK?

If you’re working as a taxi driver in the UK, then you’ll almost certainly be running your own self-employed ‘sole trader’ business. This means you’re in charge of everything, including paying the right amount of tax.

There are two main taxes you’ll need to worry about as a taxi driver – income tax/National Insurance, and road tax.

We’ll tackle income tax first.

Taxi driver income tax (including National Insurance)

The vast majority of taxi drivers work as self-employed ‘sole traders’.

What this means in terms of tax is, as long as their annual income exceeds £1,000 (the tax-free trading allowance), they must complete a self-assessment tax return for the relevant tax year and pay the appropriate tax and National Insurance contributions.

(The same applies if you’re a partner in a business partnership, but this is a very uncommon structure for taxi drivers).

As you probably know, the amount of tax you’ll pay is determined by your annual profit, with different bands for different levels of income (see the table below).

Of course, as we’ll see later, claiming your relevant expenses can reduce the amount of tax you need to pay.

Taxi driver National Insurance

As a sole trader, you’ll also need to pay National Insurance (a special tax that pays for certain benefits and the State Pension). Again, this is based on your profits, with most self-employed people paying both Class 2 and Class 4 contributions. Here’s how it works based on the thresholds for the 2020-21 tax year:

Allowable tax expenses for taxi drivers – how you can reduce your tax bill

A massive part of making sure you don’t pay more tax than you have to involves taking advantage of your allowable expenses. You can, for example, claim set amounts (see below) for the miles you travel on the job, or you might be able to claim for the costs of leasing a car, or added financial burdens like fuel and repairs.

Simplified vs actual expenses

One big decision you’ll have to make as a self-employed taxi driver is whether you want to claim simplified or actual expenses. The two options are explained in detail below, but the quick version is this – simplified expenses allow you to claim a set amount for every mile travelled on the job, while actual expenses means recording the cost of fuel, maintenance etc. and providing detailed records of these when you submit your self assessment tax return.

If you need help deciding which option is best for you, use the gov.uk simplified expenses checker to work out how much you could claim with each method.

IMPORTANT – Black cab drivers cannot claim for simplified expenses, and must record and claim their actual costs. This is because these cars are designed for commercial use.

Simplified expenses

Simplified expenses are, as you’d expect, simple. You claim a set amount for each mile travelled during your work as a taxi driver in that tax year. These amounts are:

• 45p per mile for the first 10,000 miles
• 25p per mile for 10,001+ miles

If you travelled 15,000 miles for example, you could claim £4,500 (10,000 miles x 45p) for the first 10,000 miles and £1,250 (5,000 miles x 25p) for the next 5,000 miles, meaning a total claim value of £5,750.

If you also use your taxi for personal travel, then you’ll have to separate this in your records and ensure you only claim for business miles.

Simplified expenses is designed to cover the cost of insurance, repairs, servicing, and fuel. If you claim simplified expenses, you cannot also claim for these or other running costs.

There are a few key rules when it comes to using simplified expenses.

1. You cannot claim simplified expenses for a car that you have already claimed capital allowances for, or a car that you have included as an expense when you worked out your business profits
2. You do not have to use simplified expenses for all your vehicles
3. Once you start claiming simplified expenses, you have to keep doing so for as long as you use that vehicle for business

For more info on this, visit the gov.uk page on simplified expenses for vehicles if you’re self-employed.

Actual expenses

Actual expenses does what it says on the tin – you record and claim for the actual costs of running your taxi, rather than just using a set amount per mile.

This involves keeping records of the actual cost of your insurance, your fuel, your servicing, your repairs, and any other eligible running costs, then claiming for their value in your tax return.

Here are some of the other costs you can claim for:

• Road tax (VED)
• MOT
• Licence/registration fees
• Loan interest for buying a taxi
• Business phone bills

If you are leasing your taxi, then you can simply claim for the leasing cost, which often includes running expenses like road tax, MOT, and servicing. Leasing deals don’t usually include insurance or fuel, so you will need to claim for these separately.

The obvious downside to this is the time and effort involved in accurately recording your expenses  However, using an accounting software package makes this much easier, and you may be able to claim significantly more using your actual expenses.

Also, as mentioned above, black cab drivers have to use actual expenses – so if you’re driving one, make sure you’re accurately recording your expenses.

Taxi Driver Capital Allowances – tax and vehicle purchases

Capital allowances are quite a complicated area of taxation, but here are a few key points that taxi drivers should know if they want to claim tax relief on a car they have purchased to use as a taxi.

• You cannot claim both simplified expenses and capital allowances for your taxi, only one or the other.
• Cars are not eligible for the Annual Investment Allowance (AIA), which lets you simply take the purchase price of most things you buy for business use off your profits in that year. HOWEVER, for tax purposes, a black cab (Hackney Carriage) isn’t a car (because it’s designed for commercial use), and so is eligible for AIA – so that’s one option if you purchase a black cab for your taxi driver career.
• For other cars, you’ll have to enter the murky world of writing down allowances.

How do taxi drivers pay tax?

To pay tax as a taxi driver, you’ll have to file a self-assessment tax return (for extra help on this, check out our dedicated self-assessment tax return guide).

You’ll almost certainly do this online – in 2020, 96% of tax returns were submitted online.

Registering as self-employed

To start with, you’ll probably need to register as self-employed via the HMRC portal.

To do this, you’ll need to enter a few personal details, your National Insurance number, and some details about your business.

You will then be sent a letter with your Unique Taxpayer Reference (UTR) number within 10 days – this is really important, so make sure you remember it, or keep a record of it in a safe place.

You will also be sent a letter with the activation code for your account. This is much less precious – you simply use it once to get everything going, and then get rid of it.

If you were previously self-employed, then you either need to fill in form CWF1 if your new self-employed work is different to your old self-employed work, or simply log in with your existing details if you’re returning to the same self-employed work you did previously.

When do I need to register as self-employed?

The rules are you need to register as self-employed by 5 October in your business’s second tax year.

The current tax year runs until 5 April 2022.

For example, if I started a business on 1 February 2021, then I would have to register as self-employed by 5 October 2021.

However, if I started a business at any time after 6 April, then I wouldn’t have to register until 5 October 2022.

Whatever your deadline is, make sure you meet it, as you can be fined if you don’t register in time. In practice, the important thing is that you get onto the system in plenty of time to submit your online tax return by 31 January, so you’re unlikely to be fined if you register a few days or even a few weeks late. However, there’s not much point taking that risk, so make sure you aim to register by 5 October.

IMPORTANT – You don’t need to register before you start working as a taxi driver. In fact, it’s a good idea to wait until you’ve been working for a few months, and are 100% sure you will exceed the £1,000 trading allowance that means you have to submit a self-assessment tax return.

How do I complete my self-assessment tax return?

When you do your self-assessment tax return, you’ll need to accurately enter details of your income (the fares paid by your taxi passengers) and your expenses (the money you spend running your business).

It’s imperative that you KEEP TRACK, ensuring that you maintain records of both your income and your expenses throughout the year. You’ll need to know exactly how much each fare was worth and how far you travelled, as well as the cost of your insurance, repairs, your business phone bill etc.

Getting a business bank account can help, and using accounting software can really help. Many providers have packages specifically designed for self-employed people, making it easy to keep up your records on the go. To really make things easier when it comes to submitting your tax return, look for a plan that has HMRC integration, so you can quickly and easily import all the data you need, before submitting with just a few clicks.

As mentioned above, your self-assessment is based on the tax year – 6 April to 5 April – and needs to include all income, including ‘taxed at source’ income (see below).

When do I need to submit my self-assessment tax return?

For online returns (which includes the vast majority of tax returns), the deadline is:

Yes, just to save any confusion, you are always filing for work that was completed in the prior tax year.

To take 2022-23 as an example. The tax year ends on 5 April 2024, so the deadline for filing your online tax return is 31 January 2024.

Hitting this deadline is absolutely crucial – missing it by just a day means an instant £100 fine, and the longer you delay, the more the costs mount up.

(If you are in the very small minority that submit a paper return, then you’ll also have to deal with a much earlier deadline: 31 October, in the same calendar year as the tax year finished. So, for 2024, the tax year would finish on 5 April 2024, and you’d need to file your paper return by 31 October 2024.)

Final thoughts

Despite the endless urging that “tax doesn’t have to be taxing”, there’s no doubt that tax is still an intimidating subject for many people.

And, as all the info in this guide shows, it certainly can be complex – especially if you really want to dive into the nitty gritty of claiming every last bit of tax relief you’re entitled to.

The basics, though, are pretty simple – as a self-employed taxi driver, you’ll pay income tax and national insurance on your profits (income minus expenses), as well as road tax (just like you’d pay for any other car).

For your expenses, you can generally either claim a set amount per mile, or keep track and claim for the actual costs of fuel, repairs, servicing etc. If you’re planning to buy a vehicle to use as a taxi, then you can also claim tax relief on that – although how much and in which years depends on what you’re buying.

You’ll almost certainly file your tax return online, and you’ll need to plan for payments on account, which essentially means that you make an advance payment towards the next year’s tax bill at the same time as paying your current one. This is really important in your first year – you’ll basically need to plan for paying 18 months of taxes at once.

Investing in accounting software can really help you keep track of things (and vehicle tracking can make working out your mileage a doddle). And remember, if you’re really struggling, then strongly consider consulting an accountant – you’ll not only get peace of mind, but they may even find tax savings that are at least equal to the cost of their fee.

With a bit of planning, though, there’s no reason tax should get in the way of your career on the open road.

Good luck!