How do taxi drivers pay tax?

Being a taxi driver can be a rewarding experience and it has some obvious upsides. You technically don’t have a boss, you can set your own hours, and you’ll get to meet lots of people. However, what isn’t so clear is how to pay tax. 

In this article we’ll answer the following questions:

• Which taxes do taxi drivers have to pay?
• What is Vehicle Excise Duty? (VED)
• How much tax do taxi drivers have to pay?
• How can taxi drivers reduce their tax bill? 

The vast majority of taxi drivers are sole traders, which means they have to pay national insurance and income tax. This is in addition to Vehicle Excise Duty.  

Vehicle Excise Duty is Road Tax. It’s the official name that only people within the DVLA tend to use. This tax is paid by everyone who owns a car and drives it on public roads. 

The amount you’ll have to pay depends on your:

• Vehicle type (e.g. luxury saloon, SUV, hatchback)
• Registration date
• Engine size
• CO2 emissions
• Fuel type (e.g. petrol, diesel)

You can see how much VED you’ll have to pay by using the gov.uk vehicle tax rates calculator. 

Simply visit the gov.uk website and you can pay using a debit or credit card. If you prefer Direct Debit, you’re able to do this too. 

Before you pay you’ll need one of the following:

• 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 don’t have any of these, 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 help you figure out what you need to pay, as well as the different payment options. For example, you can choose to pay road tax in instalments for an additional fee.

Something to remember: if you have an electric taxi, it will be exempt from Road Tax. So it may be a good idea to factor that into your purchasing decision if you haven’t already. 

Let’s start with National Insurance. Because you’re running a business, this is based on your profits, not your revenue. 

The National Insurance rules are as follows:

• Class 2 – £3.05 a week 
• Class 4 – 9% on profits between £9,569 and £50,270
• 2% on profits over £50,270

Let’s say your profits for the year come to £32,000. 

You’ll first have to pay a total of £158.60 for Class 2. 

You don’t have to pay contributions for your first £9,569, so that only leaves £22,431 to be taxed at 9% which is £2018.79. So you’ll have a total national insurance bill of £2177.39. 

If your profits are under £6,475 for the year then you don’t have to pay National Insurance contributions. However, it’s probably a good idea to make a voluntary payment so that you’re still eligible for a state pension and other benefits. 

The information in the table below refers to the tax year April 2021 – April 2022 and comes from the gov.uk website.

It’s important to keep in mind as you rise through the rates that each band is incremental. The higher your profits, the more it will be separated into different parts and taxed differently.  

For example, let’s say you had an outstanding year and made £64,000 in profit, double the previous year. You won’t pay any tax at all on £12,500 out of that, that’s yours, HMRC can’t touch it. 

What they can touch is:

• Your profit between £12, 571 – £50,270 which is taxed at 20%
• Your profit between £50,271 – £64,000 which is taxed at 40% 

Don’t panic if you do well thinking that HMRC are coming after 40% of all of your profits, thankfully that’s not how it works. 

There are two main ways for taxi drivers to reduce their tax bill. Either by using Simplified Expenses or Actual Expenses.

This is pretty much what it sounds like. You can claim a set amount of money for a set amount of miles driven for work during that tax year. 

This is:

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

A few things to note:

• If you do claim for Simplified Expenses, you can’t claim for other expenses such as phone bills. Simplified Expenses are only designed to cover the cost of insurance, repairs, servicing and fuel. 
• Black cab drivers can’t claim Simplified Expenses because their cars are only designed for commercial use. 
• You can’t switch between Simplified and Actual expenses. Once you choose one, you must stick to it for as long as you use the vehicle. 

This type of expense is more complex, but covers a wider range of expenses. Basically most things you do that are related to you driving a taxi can be claimed as an expense, such as:

• Road Tax
• Mechanic bills
• MOT
• Licence and registration fees
• Loan for buying a taxi 

It depends on your preferences. If you dislike financial admin, Simple Expenses is better as it’s just a simple formula. However, if you have great accounting software that helps keep you organised, like Countingup, it may be a good idea to try out Actual Expenses. 

We’re here to make sure that you don’t have to worry about financial potholes up ahead. 

Countingup is the business current account and accounting software in one app. It automates time consuming bookkeeping admin for thousands of self-employed people across the UK. With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances everyday and spend more time focussing on the road ahead. Find out more here.