Your IR35 status determines almost everything about how you claim mileage expenses. A contractor outside IR35 can deduct every legitimate business mile through their limited company. A contractor inside IR35 may find they can claim virtually nothing. The financial gap can easily reach thousands of pounds each year.
This guide covers the rules for the 2025/26 and 2026/27 tax years, including the off-payroll working threshold changes from April 2026.
Outside IR35: Full Mileage Deductions Through Your Limited Company
When HMRC considers your engagement to be outside IR35, your personal service company (PSC) operates as a genuine business. Travel expenses are ordinary business costs, and mileage is fully deductible against your company’s profits.
You have two options for claiming vehicle costs:
- Simplified mileage rates — 45p per mile for the first 10,000 business miles in the tax year, then 25p per mile thereafter. This flat rate covers fuel, insurance, servicing, and depreciation in a single figure.
- Actual costs — claim the real running costs of your vehicle (fuel, insurance, road tax, repairs, depreciation or lease payments) and deduct the business-use proportion. This method requires more detailed records but can produce a larger deduction if your vehicle costs are high.
Your limited company deducts these costs before corporation tax, reducing your overall tax liability. There is no blanket 24-month restriction on corporate travel deductions, though HMRC can still challenge journeys to what they consider a permanent workplace. For a detailed comparison of these two approaches, see our guide on actual costs vs mileage rate for the self-employed.
Inside IR35: Why Most Travel Deductions Disappear
When an engagement falls inside IR35, HMRC treats you as a deemed employee of the end client. Your expenses shift from business rules to employment rules, and the difference is stark.
Under employment rules, travel and subsistence costs are only deductible if they meet the “wholly, exclusively and necessarily” test. For mileage, this means you can only claim journeys to a temporary workplace — and most inside-IR35 contractors find that their regular client site fails that definition.
The 24-month and 40% rules
A workplace is temporary only if you attend it for fewer than 24 months and your attendance is expected to be temporary from the outset. The moment an engagement is expected to last beyond 24 months, the site becomes a permanent workplace and ordinary commuting rules apply. No mileage relief is available.
Even within the 24-month window, the 40% rule can catch you out. If you spend more than 40% of your working time at a single location, HMRC can reclassify that site as permanent. A contractor attending a client office four days a week will almost certainly breach this threshold.
For the full detail on how these rules interact, read our guide on temporary workplace rules and HMRC mileage.
The 5% flat-rate allowance
When working inside IR35 through a limited company, HMRC historically allowed a 5% flat-rate deduction from gross contract income to cover the costs of running your PSC. However, this allowance has been significantly restricted:
- Public sector engagements — the 5% allowance was removed entirely from April 2017.
- Medium and large private sector clients — the 5% allowance was removed from April 2021 under the off-payroll working (Chapter 10) rules.
- Small private sector clients — the 5% allowance still applies, but only where the end client qualifies as “small” under the Companies Act 2006.
From April 2026, the small company thresholds are increasing. To qualify as small, a company must meet at least two of: annual turnover not exceeding 15 million pounds, balance sheet total not exceeding 7.5 million pounds, or no more than 50 employees. This means roughly 14,000 companies previously classified as medium will become small, restoring the 5% allowance and PSC self-assessment responsibility for contractors engaged by those firms.
Where the 5% allowance is available, it replaces itemised expense claims — you cannot claim both. On a contract worth 120,000 pounds per year, the 5% allowance gives you 6,000 pounds of relief. Compare that to the 15,000 to 25,000 pounds in genuine expenses many contractors incur, and the shortfall is clear.
The Supervision, Direction and Control (SDC) Test
The SDC test determines whether umbrella company contractors and certain agency workers can claim travel and subsistence expenses. Since April 2016, any worker subject to supervision, direction, or control over how they do their work cannot claim travel expenses to their regular workplace.
HMRC defines the three elements as:
- Supervision — someone overseeing your work to ensure it meets required standards.
- Direction — someone providing instructions or guidance on how the work must be done.
- Control — someone dictating what work you do and how you do it, including moving you between tasks.
Crucially, HMRC only requires that the client has the right to exercise SDC — it does not need to be actively used. For limited company contractors outside IR35, the SDC test does not apply. For inside-IR35 contractors and umbrella workers, failing the SDC test (which most do) removes travel and subsistence relief entirely.
Real-World Example: Two IT Contractors, Two Very Different Outcomes
Consider two IT contractors, both earning 500 pounds per day and driving 12,000 business miles per year.
Sarah — outside IR35: Sarah operates through her PSC. Her company claims mileage at HMRC rates: 10,000 miles at 45p (4,500 pounds) plus 2,000 miles at 25p (500 pounds), totalling 5,000 pounds. This reduces her corporation tax bill by around 1,250 pounds (at 25%). She also claims parking and subsistence. For the current rates, check our HMRC mileage rate 2026 guide.
James — inside IR35 at a large client: James works at a single medium-sized client site. His engagement has lasted 18 months and is expected to continue. The 5% allowance is not available for medium clients. He attends four days per week (breaching the 40% rule). Result: James can claim zero mileage relief. His 12,000 business miles generate no tax saving whatsoever.
The annual difference in deductible mileage alone exceeds 5,000 pounds — before considering subsistence and accommodation.
Record-Keeping: What HMRC Expects From Contractors
Whether you are inside or outside IR35, HMRC expects contemporaneous mileage records. “Contemporaneous” means recorded at or near the time of the journey, not reconstructed months later from memory.
Each record should include:
- Date of the journey
- Start and end locations
- Business purpose
- Miles driven
- Running total for the tax year (to track the 10,000-mile threshold)
For inside-IR35 contractors, records carry additional weight. You need to demonstrate that each journey was to a temporary workplace and that the engagement met the temporary criteria from the outset. If HMRC challenges your claim, having GPS-verified records with timestamps is far more persuasive than a handwritten spreadsheet.
Tripbook logs every journey automatically using GPS, recording the date, route, distance, and purpose. It calculates your mileage at the current HMRC rates and exports reports that align with what HMRC expects in an enquiry. For detailed guidance on what constitutes a compliant log, see our article on business mileage record-keeping for HMRC.
Practical Steps and Summary
IR35 status creates a fundamental divide in how contractors claim mileage expenses. Outside IR35, your limited company deducts travel costs as normal business expenses — 45p/25p rates or actual costs, with no automatic 24-month cutoff. Inside IR35, employment rules apply: the temporary workplace restrictions can eliminate your mileage deductions entirely, and the 5% allowance (where it survives) rarely covers the real cost of business travel.
The April 2026 threshold changes will shift some contractors back to self-assessment responsibility, potentially restoring the 5% allowance for those engaged by newly reclassified small companies. But for most inside-IR35 contractors at medium or large clients, the position remains restrictive.
To protect your position:
- Confirm your IR35 status — use HMRC’s CEST tool or seek professional advice. From April 2026, check whether your end client’s size classification has changed.
- Assess the temporary workplace rules — calculate when the 24-month clock started and whether the 40% threshold applies.
- Review your SDC position — if working through an umbrella, gather evidence that you are not subject to supervision, direction, or control.
- Track mileage from day one — whether you use Tripbook or another method, start logging before your first claim. HMRC expects contemporaneous records.
- Keep your contract aligned with reality — HMRC looks at actual working arrangements, not just what the contract says.
Whichever side of IR35 you fall on, accurate mileage records are non-negotiable. Tripbook makes this straightforward — GPS tracking, automatic HMRC rate calculations, and export-ready reports that stand up to scrutiny.
Download Tripbook from the App Store to start building HMRC-compliant mileage records for your contracting engagements.
