On yer (tax-free) bike By Steve Lodge
Financial Times Published: January 4 2008 15:56 | Last updated: January 4 2008 15:56
January may not seem the most obvious month to get on a bike. But New Year resolutions and bicycles received as Christmas presents boost new cyclist numbers in mid-winter and for those tempted by two-wheel transport, there are a selection of tax breaks.
Under the government¹s ³Cycle to Work² scheme, employers can offer staff the option of buying a bike out of their pre-tax income, discounting the retail cost by up to about a half and there are associated savings too.
³People start cycling in January despite the weather,² says Tom Bogdanowicz, campaigns manager of the London Cycling Campaign (LCC), a lobby group.There has been a near-doubling to 500,000 in the number of daily journeys by bike in London since 2000. The LCC says that during the morning traffic peak there is now one bike for every five cars in the capital¹s congestion charge zone, and adds that most London cyclists save the cost of their bike in a couple of months by not using public transport.
Under the scheme, technically the employer buys the bike and reclaims the VAT, so also saving staff 17.5 per cent. The VAT-free price is then deducted from gross salary in 12 or more instalments.
Higher-rate taxpayers save 41 per cent in tax and National Insurance deductions, while basic rate taxpayers save 33 per cent (22 per cent plus 11 per cent NI). Once the payments are complete, the employee can buy the cycle outright at a ³fair market price², generally about 10 per cent of the original cost.
Ellie Gamble, senior manager, employer solutions, at Grant Thornton, the accountants, says for a bike retailing for £500, the scheme could mean a £23.61 gross salary deduction for 18 months. For higher-rate taxpayers, the net cost would be £13.92 a month or £250.56 in total.
Schemes are normally run via local bike shops and accessories such as helmets, lights and locks can also be bought under the same terms. At least
50 per cent of bike use is meant to be for work.Gamble says about one in seven of companies offering their staff ³flexible benefits² include cycle purchase, but only one in 20 employees takes advantage of the scheme. And Bogdanowicz adds that many companies and employees are ³just not aware of the scheme².
Because such schemes normally involve a ³salary sacrifice² reduction in gross earnings, the amount an employee can borrow for a mortgage and some pension benefits can be slightly affected.
The other tax perk for cyclists is a little-known 20p-a-mile allowance for work-related travel. If you use your bike for business travel, such as going to meetings, your employer can pay you up to 20p a mile tax-free. Allowances over 20p a mile are taxable. But if your employer pays nothing or less than
20p, you can claim a deduction from taxable income to reduce your tax bill. For example, a higher-rate taxpayer cycling 20 work-related miles a week for which they receive no payment from their employer, could claim £160 of mileage allowance saving them £64 (40 per cent of £160) in tax.You cannot claim mileage allowance if you are still paying for a ³cycle to work² scheme bike because the 20p a mile is only available to bike owners and it is also not normally available for commuting. The allowance is also available to the self-employed to reduce their tax bills, adds Gamble.
A final perk is that employers can provide ³cyclists¹ breakfasts² as a no-cost, tax-free benefit although the taxman¹s largesse is limited to six breakfasts a year.