A step in the right direction

The mileage allowance increasing from 45p to 55p is one of the most practical real-world changes for self-employed people. The rate has been frozen since 2011, and could mean significant savings when claiming back expenses.

The catch:

The rate change only applies to people who use their personal car or van for work. It means self-employed people from trades to driving instructors and dog walkers can claim up to £1,000 more in allowable mileage for the first 10,000 miles.

Perhaps not far enough:

The rate remains unchanged at 25p for any mileage above 10,000 miles. After a 15-year wait for policy change, this may leave some frustrated.

What the savings could mean

Lee Murphy, Managing Director at The Accountancy Partnership, explains why the uplift is really important for self-employed people and what mileage rate savings could mean:

“We’ve seen lots about what this change means for employees, but we really want to highlight what this means for people who are self-employed. The same benefits apply.

“Many self-employed people like tradespeople will rely on their personal vehicle to drive between jobs, be it a van or a car. They’ve likely been absorbing persistent cost of living increases associated with that vehicle, such as rising fuel and maintenance fees.

Potential cash flow relief

“The change in allowance marks a step in the right direction, something that can make a practical and meaningful difference to their taxable profits. As small as it sounds, that 10p extra can provide cash flow relief and increase financial security on something relied upon for work.

Backdated relief

“What’s really useful to see is that the new 55p rate can be backdated to April 2026. We advise our clients to keep accurate mileage records, so it’s great to know they’re able to receive the full benefit of the change this tax year, not next.

Tips for claiming self-employed mileage expenses

Helping to clear up any confusion around the latest mileage allowance update, Lee Murphy reveals his tips for how self-employed people hoping to understand and benefit from the government update:

Keep accurate mileage records

“HMRC may ask for evidence to support vehicle expense claims, such as mileage. Keep records accurate and well organised for at least six years after the end of the relevant tax year.”

Remember to back date

“Don’t forget the increase in mileage allowance is backdated to the beginning of the tax year (April 2026). Use your mileage records to claim the full benefit of the updated policy with the new rates.”

Ensure you’re using a personal vehicle

“The mileage allowance increase only applies to the use of personal vehicles for work. It may not apply in the same way if you are hiring a vehicle or if you own a vehicle through your limited company.”

Don’t include personal trips

“It’s important to make a clear distinction between a personal or business trip. Business miles must be exclusively made up of travel for business purposes. You can’t include commuting to work.”

Check you’re using the most efficient method to claim

“It’s up to you whether you work out your claim using the simplified flat-rate per mile method, or by calculating the actual costs such as fuel, maintenance, and insurance. If the actual costs are higher than what you’d get back claiming the rate per mile, use those instead.”

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It’s rolling out in phases, beginning in April 2026, but whether or not you need to start complying with the MTD rules depends on your qualifying income.

In this article, we’ll go through the key changes and also explain how you can best prepare yourself for the switch to MTD.

What is MTD IT?

Making Tax Digital for Income Tax (MTD IT) is HMRC’s plan to replace the Self Assessment with a new digital reporting system. It’s being rolled out gradually, starting with sole traders and landlords.

What will change?

In short, the arrival of MTD IT means instead of submitting a Self Assessment tax return, those that qualify will need to record their Income Tax records digitally and submit quarterly updates to HMRC via approved software.

You must also send a final submission (called a ‘Final Declaration’) once the tax year is complete; this will include all your income from the year, not just your ‘qualifying’ income.

What counts as qualifying income?

MTD IT applies to any sole trader and property (rental) income, and refers to your gross turnover (total money in before expenses), not your net take-home profit.

Your final submission may also include income from other sources (e.g. dividends, wages from traditional employment, or your share of a partnership’s profits). HMRC won’t count this towards your qualifying income for MTD reporting purposes, but you’ll need to include it on that final tax return so you can be taxed on everything correctly.

Does MTD affect freelancers?

As a freelancer, you earn self-employed income, so if you operate as a sole trader these changes will apply to you.

When exactly you need to start complying depends on your income level, with the new system rolling out gradually over time.

For example, if your qualifying income from freelancing and/or property is over:

• £50,000 in the 2024/25 tax year; from April 2026
• £30,000 in 2025/26; from April 2027
• £20,000 in 2026/27; from April 2028

If your turnover is more than £50,000, it could be worth considering operating through a limited company for tax-efficiency.

That would mean completing a Company Tax return and paying Corporation Tax instead – but ask an accountant first to weigh the pros and cons.

What happens if you don’t pay?

There are penalties for non-compliance, with HMRC using a points-based system based based on a percentage of your earnings for this and late payment penalties.

As MTD IT is still in the early stages, penalties are not currently being issued if you’re late submitting a quarterly update, but they will start being issued after the 2026/27 tax year.

After this, missing a deadline to submit a quarterly update will earn you a point, and you’ll receive a penalty of £200 if you receive four points.

Your MTD Income Tax Return is due annually, and missing the deadline earns you a point.

With this, though, a £200 penalty is applied if you receive just two points.

How do I comply with MTD?

The MTD IT rules talk about keeping ‘digital’ records, which means you’ll need to start recording your income and expenses using MTD-compliant software.

Once you have the software, you’ll:

• Create digital records for all your business transactions
• Send quarterly updates – due one calendar month and 7 days after the end of each quarter
• Submit a Final Declaration (which will include all of your other income too, not just your self-employment/property income – so it replaces the current Self Assessment)

Is anyone exempt?

You can apply for an exemption against using MTD IT if it’s simply not practical for you to keep and submit digital records – for example, due to age, disability, or religious beliefs.

You won’t need to comply at all if:

• Your qualifying income is below £20,000
• You’re a non-resident company, trust, or estate
• You don’t have a UK National Insurance number

Preparing yourself for MTD

So, you need to start complying.

Even if you don’t just yet, getting started with digital record keeping now will make your life a whole lot easier down the line – and if MTD IT is on the horizon for you, there’s no harm in getting ahead of it.

Thankfully, there are a number of steps you can take to help get yourself ready.

Get software

The first thing you’ll want to do is look for online accounting software that’s fully compliant with Making Tax Digital.

Ideally it will meet the requirement for digital bookkeeping and be able submit your quarterly updates and final declaration directly to HMRC. Not all software will do both, so you might need additional bridging software to connect your digital records to HMRC unless the connection is already available!

Do some research and try to find bookkeeping software that’s right for you, based on your own needs and preferences.

Remember: the simpler the better.

Align your reporting periods

Your quarterly updates will align with the standard tax year quarters. Fortunately, under recent tax rule changes, your accounting software will automatically handle this timing for you, so you do not need to worry about changing your business year-end dates.

Plan ahead

Now, if you are someone who doesn’t yet need to follow the MTD rules, you can actually choose to opt in early – and if you’re going to start digitising your records anyway, then this makes a lot of sense.

If you do sign up early, you must obviously make sure you’re following the rules and meeting the various deadlines throughout the year.

It might not be mandatory for you yet, but getting everything in place early is the smart way to go.

You could also speak to an accountant, who will simplify the whole process and ensure you’re operating in the most tax-efficient way possible.

They may even be able to recommend MTD-compliant bookkeeping software.

 
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