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Four tax breaks to encourage cycling, at the tax man's expense!

• Travelling expenses
   
• Free parking
   
• Free breakfasts, and best of all
   
• Cut price bikes!

Click on each link, or scroll down, for details...
 

Travelling expenses

Your employer can (if it chooses) pay you up to 20p per mile for cycling in the course of your job, and you would not have to pay any tax or National Insurance on the amount paid. 

Allowable journeys will not include cycling to and from work, but could include cycling between different sites, or visits away from your usual place of work.

If your employer won't pay that much (or anything at all), you can still claim tax relief at up to 20p per mile for all business mileage.

For instance, if you cycle 1,000 miles in the course of a year on business, you could claim £200 from your employer, tax free. 

If your employer won't pay anything at all, you could claim £200 tax relief from the tax man.  To claim the relief, write to your tax office at the end of the tax year (5 April) and say you are claiming 'mileage allowance relief'.  You will need to be able to support your claim with a detailed record of the journeys making up your claim.  If you pay tax at the basic rate of 22%, you will save tax of (£200 x 22%) £44.

If, say, your employer had paid you 10p per mile for your business travel by bike, you could claim the balance of 10p per mile as mileage allowance relief.
 

Free parking

The provision of parking spaces for cycles is tax free
 

Free breakfasts

If an employer holds a designated ‘cycle to work day’ to promote cycling instead of driving to work they can provide refreshments or a meal for employees who cycled when they arrive at work. A maximum of six cyclist ‘breakfasts’ a year per employee are exempt from tax and NICs.
 

Cut price bikes from your friendly employer

Yes!  Unlikely as it may seem, the best place to look for a discount on a new bike could be your own employer

A little known tax exemption allows employers to lend or hire cycles and cycle safety equipment to employees without the employee incurring any charge for tax or National Insurance Contributions (NICs).  There is a condition that the cycle is used 'mainly' for commuting to work, although you don't have to keep records to prove it.

You might think that this is not very exciting news.  But this exemption can be implemented in a surprisingly tax efficient way that enables employees to purchase cycles through a carefully designed scheme that can knock as much as 50% off the cost of a bike, and at the same time save your employer money.

Sound far fetched?  This is how it works...

1. Choose a bike

Say you would like to buy a new bike costing £600. 

2. Pay for the bike

Actually, your employer buys the bike, and you agree to accept a salary sacrifice of, say, £200 per annum for three years - £600 in total.  At the end of the three years, you buy the bike from your employer for its residual value to your employer, say, £50.

This is the clever bit.

Because you are accepting a salary sacrifice of £600, you save the tax and NICs that you would otherwise have paid on the £600 that you have sacrificed.

If you pay tax at the basic rate, you save tax at 22%, plus NICs of as much as 11% (less if you are contracted out of the state second pension, perhaps because you are a member of your employer's pension scheme).

Tax	£600 x 22%	£132
NICs	£600 x 11%	£66
Total saving		£198

3. How much did that cost?

A £600 bike just cost you (£600 salary sacrifice, plus £50 residual value, less £198 tax and NICs) £452, a saving of almost 25%!

If your employer is VAT registered, and if you use the bike (even a tiny bit) on business, your employer can recover the VAT on the bike.  However, you would have to pay VAT on the £50 residual value. 

In that case, a bike costing £600 including VAT - £510 plus VAT - will cost a basic rate taxpayer just £400 (£510 salary sacrifice, plus £58.75 residual value (inc VAT), less £168 tax and NICs), a saving of 33% against the VAT inclusive price of £600!

If you pay tax at 40%, the saving is even bigger.

Incidentally, you can include cycle safety equipment in the scheme, so a new helmet and lights for the bike could be included in the package.

 

Why would my employer do that?

You may wonder why your employer would pay £600 up front for a new bike for you, and only get the money back over three years.

The very good answer is that your employer can save as much tax as you!

This is how it works...

1. Pay for the bike

In addition to the £600 cost of the bike, the employer is also financing the cost which you only repay over 3 years.  Say the total cost is £650.

2. Savings for employer

Say your employer is a small but profitable company paying corporation tax at 19%, and is VAT registered.  Your employer will get tax relief (capital allowances) on the cost of the bike, and will save employer's NICs on the salary sacrifice that you agreed to:

Capital allowances	£460 x 19%	£87
NICs	£510 x 12.8%	£65
Total saving		£152

Large profitable companies pay corporation tax at 30%.  Individuals and partnerships may pay tax at as much as 40%.  The tax savings for such employers are even greater!

3. How much did that cost?

The bike cost £560 (VAT exclusive cost of £510, plus £50 finance costs) and you have paid your employer £560 in total by taking a salary sacrifice of £510 and purchasing the bike after 3 years for £50 plus VAT.  Net cost to the employer: £Nil.

But your employer has saved tax of £152.  Your employer ends up £152 better off, and you saved £198!

If you want, you can shed a tear for the tax man, who has financed this wonderful scheme.

 

The small print

As with all tax saving schemes, this has to be done right.  But why not ask your employer? 

There are companies that will handle the details for an employer.  See www.cyclescheme.co.uk, www.evanscycles.com/ride2work, www.cyclesolutions.co.uk or  www.booost.uk.com (for large organisations).  If your employer wants to know the details, you could refer them to the following http://www.inlandrevenue.gov.uk/pdfs/ir176.htm.

As we said, this is a little known scheme and most employers will likely know nothing about it.  However, if you are hoping to persuade your employer to operate the scheme for you, point them in the direction of Cyclescheme, Evans Cycles, Cycle Solutions or Booost who will take a lot of the hassle out of the process for them.

And by way of encouragement, the following employers are known to operate the scheme for their employees:

Intier Automotive

Cycle City Guides

Jack Brand

NB Electrically assisted pedal cycles are not included in the scheme.

If you need advice, send an e-mail to Nick Munton.

NB This advice was up to date as at November 2006.

Send mail to the webmaster lcag2008_@_munton.net (remove the underscores) with questions or comments about this web site.