Your quick guide to the new taxi tax check policy

One of the most appealing things about being a self-employed taxi driver is that you can be your own boss. This freedom to set your own hours has led almost 365,000 people in the UK into becoming taxi or private hire drivers.

However, that freedom comes with a small price: you have to manage your own taxes. It can be difficult getting your head round all the tax implications, and things are about to get that bit trickier for taxi drivers with the introduction of new legislation.

We’re here to simplify the new rules as best as we can, so that when they come into effect in April 2022, you know what to expect. In the second half of this article, we’ll rundown everything you need to know about income tax as a taxi driver including how you can claim expenses such as taxi insurance.

First, let’s get into the new tax checks which will apply to all taxi and private hire drivers.

 

 

What do you need to know?

The new tax checks have been in the works for a while. Back in the 2020 Budget, the government first announced its plans to bring in a check on tax registration (tax check) in the taxi and private hire industry.

The top line is that, from April 2022, in order to renew your taxi licence with your licensing authority, you will need to complete the new tax check. The new rules only apply in England and Wales – for the time being, the legislation won’t apply in Scotland and Northern Ireland, but this could change in the future.

The tax check will ensure drivers are registered with HMRC for tax purposes, and that they are paying the right amount of income tax.

Why is the government introducing the tax check?

The government wants to shine a light on what it calls a ‘hidden economy’ operating in the UK. It believes this so-called hidden economy is worth as much £2.6bn, with the taxi and private hire industry accounting for £65m in unpaid tax each year.

While it acknowledges that much of this tax gap is down to people being unaware of, or confused about, their tax obligations, some drivers are thought to be playing the system to their own advantage.

By introducing the tax check – making it essential for licence renewal – all drivers will be required to be upfront and honest about their income – or at least that’s what the government is hoping. With licensing bodies unable to process a renewal application without the HMRC code that verifies the driver has completed a tax check, it seems fairly air-tight on the surface.

How will it work?

The HMRC insists that drivers must carry out the tax check themselves and cannot ask a tax agent or adviser to do this on their behalf.

The questions will revolve around how you pay any tax that may be due on income you earn from your licensed trade. Once you have answered all the questions, you will be given a 9-character tax check code.

Taxi and private hire drivers applying for a licence for the first time will not need to complete the tax check. However, it’s the job of licensing authorities to point cabbies in the direction of HMRC guidance on how to register for tax in the future and the driver will need to confirm they have read the information.

The government says the online service will be kept as simple as possible for both drivers and licensing bodies, while help will be provided to applicants who would prefer to do the tax check offline.

The system is said to be costing HMRC some £4.5 million, with a further £5.5 million in costs for staff resources. It’s estimated that the new rules will cost licensing bodies up to £1.8 million to carry out the extra work.

Some 400,000 licensed businesses – which includes scrap metal collectors – are expected to be affected by the new measures from 2022 to 2023.

What do you need to do in preparation for April 2022?

Although the tax check will officially be rolled out in April, you won’t have to do anything until you need to renew your taxi licence.

However, the government advises all drivers to ensure they have a Government Gateway user ID and password in preparation for the tax check, so that when the time comes to make a licence application, there’s nothing holding you up.

Once you’re signed up, check that your details are present and correct.

How much tax should you be paying?

Ahead of the new rules coming into force, now seems like as good a time as any to get to grips with your tax obligations. If, like most taxi drivers, you work as a self-employed sole trader, you will need to pay two main taxes: income tax/National Insurance, and road tax.

To ensure you’re paying the correct tax on your income you need to complete a self-assessment tax return for the relevant tax year. If you’re self-employed, you can make use of the government’s self-assessment tax bill tool which will automatically calculate how much you might need to pay. Failure to register with HMRC as self-employed within three months of setting up your business could end with you having to pick up a fine of £100.

Tax returns can be completed on the HMRC website. You need to provide details about you and your business and your self-employed work. If you keep accurate business records of income, sales and more, then it is far easier to complete. Once this is done, you’ll receive confirmation from HMRC and a Unique Taxpayers Reference for you to use in any future communications.

As you’re probably already aware, the amount of income tax (and National Insurance contributions) you owe depends on the amount of profit you make each year – there are different bands for different levels of income. But there are ways and means to legally reduce the amount of tax you need to pay.

 

 

Understanding tax rates and expenses

The first thing to note is that if your annual income (which is different from your profits) is under £12,570, you won’t have to pay a penny in income tax – but you still need to submit a tax return. This first £12,570 is known as a ‘personal allowance’ – for all the money you make over this, however, you’ll need to pay income tax on it.

As per Gov.UK, here is a breakdown of income tax rates and bands:

• Personal Allowance - Up to £12,570 - 0%
• Basic rate - £12,571 to £50,270 - 20%
• Higher rate - £50,271 to £150,000 - 40%
• Additional rate - over £150,000 - 45%

However, as we’ve already mentioned, the bands are incremental, which means you pay different rates on the amounts in each band.

The Startups website gives an example to explain how this looks in practice:

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.

This example doesn’t take into account any expenses that have been claimed for.

One of the benefits of completing your tax return correctly is the ability to claim back business expenses.

There are various ways you can claim expenses for common outgoings for your business. You can use the HMRC’s Fixed Scale Mileage Rate. To do this you’ll need to keep an accurate record of miles driven. The amount you can currently claim is 45p per mile for the first 10,000 miles, and then 25p per mile for every mile thereafter.

As an alternative you can claim expenses for your vehicle running costs, which could include things like:

• Fuel costs
• Repairs and servicing
• Road tax and MOT test
• Cleaning and washing the vehicle
• Licence and registration fees
• Radio hire
• Accountancy fees
• Parking and toll charges
• Taxi insurance
• Loan interest for purchasing a taxi
• Breakdown membership fees
• Business phone bills

If you buy a vehicle to drive 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 car’s emissions.

How much do you need to pay in road tax?

Vehicle Excise Duty (VED) – or road tax, as it’s more commonly known – is something all drivers who own their own car have to pay. As an experienced driver, you’ll probably be well aware of your road tax obligations already.

However, if you’re just starting your taxi business – when funds might be in short supply – it’s important to remember that VED is more expensive the first year that a vehicle is on the road. So, when choosing your vehicle or fleet of vehicles, remember to take VED into account. After the first year, the renewal payment is lower for subsequent years.

If you’re begrudged to pay VED – or are conscious of keeping your costs down as much as you can – you might want to consider getting an electric vehicle, as you won’t have to pay any road tax at all. But you must still go through the process of taxing your vehicle as a means of getting the car legally registered.

Buying an electric vehicle will also minimise your fuel costs. But you will need to factor in things like how many miles the car can do on a single charge and ensuring you’re set up at home or at your business with a charging point.

If you’re not quite ready to go electric just yet, you will need to work out how much road tax will cost for your car of choice – the government’s free vehicle tax rates calculator is very handy indeed.

Road tax is determined by factors including:

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

The rules on which cars pay which amounts of road tax are constantly in flux, so you need to keep an eye on this.

Struggling to complete your self-assessment tax returns?

If you are still getting to grips with what is required of you to complete your self-assessment tax return accurately and on time, it pays to spend a few minutes reading our guide.

Written specifically for taxi drivers, it covers everything from how to identify if you’re classified as ‘self-employed’ or not, the self-assessment tax return deadlines (including the penalties for missing the self-assessment tax return deadlines) and then the nuts and bolts of completing your self-assessment tax returns.

However, from April 2022, you will need to add completing your tax check into the list of things that you need to do to stay compliant with all the relevant legislation.

The last thing you need when it comes to renewing your taxi licence is to find out that you’ve not adhered to all the tax rules and be denied your application. It really does pay to be prepared.

Protecting your investment with taxi insurance

As a self-employed taxi driver, there’s lots to think about to ensure that you can carry out your work without the worry that something is going to come and blindside you. But nothing is more important than making sure you’re protecting your investment with suitable taxi insurance.

With the right taxi insurance policy in place, you can concentrate on covering the miles and providing the best possible service for your passengers.

At Taxi Insurer, we’ll search our panel of leading UK insurers to save you time. Alongside taxi insurance we offer interest-free payment plans to help manage your business expenses in the best way for you.

Arrange a no-obligation taxi insurance quote today and make sure your livelihood is protected.