Tax for taxi drivers explained – the in-depth guide
As a taxi driver, tax can be tricky. Our in-depth guide will explain how much income tax you should pay, how road tax works for taxi drivers, and how you pay tax as a taxi driver.
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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.
This guide will cover:
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:
So, if your annual profit was £25,000:
- You would pay annual Class 2 National Insurance contributions of £158.60 (£3.05 x 52 weeks)
- You would pay no Class 4 National Insurance on £9,500, leaving £15,500 to be taxed at the relevant rate.
- On this £15,500, you would pay 9% Class 4 National Insurance, so a total of £1,395.
- Your total Class 2 and Class 4 National Insurance contributions for the year would therefore be £1,553.60 (£158.60 + £1,395).
If your annual profits are under £6,475, then you don’t have to pay National Insurance contributions. However, you may wish to make voluntary contributions to ensure you’re eligible for a state pension or other benefits.
For more info on this, check out the gov.uk page on self-employed National Insurance rates.
The easiest way to work out your total tax bill is to use the gov.uk self assessment tax bill tool. Simply enter your details, and it will tell you how much income tax and National Insurance you’ll need to budget for.
Taxi driver income tax
The table below sets out the different income tax bands for the 2020-21 tax year.
Source: Money Advice Service
For more information on this, see the gov.uk page on income tax rates.
There are two really important things to note here:
- The personal allowance – If your annual income (not your profits) is under £12,500, then you don’t pay any income tax, but still need to submit a tax return. For everyone else, you’ll only pay income tax on the part of your income that’s above £12,500.
- The tax bands are incremental – This means that different rates are paid on the amounts in each band. As mentioned above, you’ll pay nothing on any income up to £12,500, and then 20% on any income between £12,501 and £50,000. You'll then pay 40% on any income between £50,001 and £150,000, and so on.
So, if your annual income was £30,000:
- You would pay no income tax on £12,500, leaving £17,500 to be taxed
- On this £17,500, you would pay 20% income tax, so a total of £3,500.
Of course, this would be before relevant expenses were claimed for.
Please note that different rules apply if you’re based in Scotland. Find out more about income tax in Scotland here.
What is Vehicle Excise Duty - road tax for taxi drivers
Vehicle Excise Duty (VED) – or road tax, as everyone outside the DVLA calls it – is paid by all vehicles on public roads. As a taxi driver, you’ll usually have years of driving experience, and so will already be used to paying it. But in case you’re confused, here’s a quick guide to how it works.
The crucial thing to remember about road tax (VED) is that it’s essentially two taxes in one – there’s a higher and more complex first year payment for the first year that a vehicle is on the road, and then a lower annual renewal payment for subsequent years.
Multiple factors decide how much you pay in road tax, but the most important one is emissions – the more emissions your car produces, the more tax you’re likely to pay. So, basically, the more powerful your car, the more expensive taxing it is likely to be.
The key exemption is electric vehicles – at the time of writing (January 2021), these vehicles do not have to pay any road tax at all, although you will still have to complete the process to tax your vehicle in order to ensure your car is legally registered.
There are also other vehicle tax exemptions (such as for disabled drivers, or drivers of cars that are over 40 years old) that may apply to some taxi drivers.
Taxi drivers must also meet the legal obligations for drivers, such as ensuring you have the correct license, and should also check the private hire vehicle/taxi licence guidelines for their local area.
How much does road tax (VED) cost?
The easiest way to work out how much road tax will cost for your car (or a car you are thinking about buying) is to use the gov.uk vehicle tax rates calculator.
The factors that affect the cost of road tax for a vehicle include:
- Vehicle type
- Registration date
- Engine size
- CO2 emissions
- Fuel type (e.g. petrol, diesel)
However, for most cars, it’s only the first payment that’s based on a complex calculation. This is usually included in the on-the-road (OTR) price paid for a new car.
After this, the cost depends on when the vehicle was first registered. For vehicles registered after 31 March 2017, the system is especially straightforward – you’ll pay a flat rate of £150 a year, or £140 a year for alternative fuel vehicles such as hybrids (and, as we mentioned earlier, nothing for fully electric vehicles).
However, these rates are subject to annual increases in line with inflation, and the rules on which cars pay which amounts of road tax change frequently – so make sure you keep an eye on this.
For more information, check out Auto Express’s in-depth guide to VED road tax.
How do I pay road tax (VED)?
Thankfully, paying road tax is easy.
You can pay online via gov.uk, with a debit/credit card, or via Direct Debit.
To get started, you’ll need a reference number, found on:
- A recent reminder letter (V11) or ‘last chance’ warning from the DVLA
- Your vehicle log book (V5C) – this must be in your name
- The green ‘new keeper’ slip from a log book (for newly purchased vehicles)
If you’ve not got any of these, then you’ll need to apply for a new log book. This costs £25, and can usually be done online.
Once you’ve logged in, the online process will guide you through what you need to pay, as well as the different payment plans available. You can opt to pay road tax in instalments for an additional fee.
Finally, it’s worth noting that paper tax discs were abandoned in 2014. The entire process is digital now, so don’t expect to get one through the post.
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 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.
- 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
- You do not have to use simplified expenses for all your vehicles
- 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 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)
- 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.
How to choose
It can be difficult to know whether you should use simplified or actual expenses as a taxi driver. The bottom line is, the more valuable your taxi, the more you’ll be able to claim by using actual expenses, as the cost of repairs, insurance, and the like will be higher for more expensive cars. These cars are also often less efficient in terms of fuel, and so will have higher fuel costs than more modestly priced models.
However, it’s a personal decision, and if you hate paperwork, then simplified expenses is a very attractive option – no matter what the value of your taxi is.
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.
If you have a choice of claiming a lot of relief in one year (through either AIA or the first-year allowance) or spreading the relief over multiple years (using writing down allowances), then make sure you consider these options carefully.
While the one-year approach is simpler, sole traders can sometimes pay less tax overall by ensuring their profit remains steady over multiple years, instead of being significantly higher (and potentially being in a higher income tax band) in particular years.
To get the right advice for your individual circumstances, it’s a really good idea to consult an accountant when considering these types of major purchases.
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 tax year runs from 6 April to 5 April, so the current tax year is 6 April 2020 to 5 April 2021.
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 on 1 May 2021 (or 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).
Yes, just to save any confusion, you are always filing for work that was completed in the prior tax year.
To take 2020-21 as an example. The tax year ends on 5 April 2021, so the deadline for filing your online tax return is 31 January 2022.
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 2021, the tax year would finish on 5 April 2021, and you'd need to file your paper return by 31 October 2021.)
Expert insight – Abid Hussain, Transport Manager at Cabzilla
Veteran taxi driver Abid Hussain from Cabzilla shared his experiences of paying tax as a taxi driver, as well as top tips for drivers just starting out.
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.”
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!”
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.