Heavy traffic, rising transport costs and growing environmental concerns have encouraged many people to swap four wheels for two. Cycling can often be a faster and more affordable way to travel, particularly in busy towns and cities.
If you operate through a limited company, purchasing a bicycle through the business could also provide valuable tax advantages. However, before making a purchase, it is important to understand the tax implications and the different options available.
This guide explains how a company bike scheme and whether using the Cycle to Work salary sacrifice scheme could be beneficial.
Option 1: The Company Purchases and Owns the Bicycle
For many owner-managed businesses, this is often the simplest and most tax-efficient approach.
Under this arrangement, the company purchases the bicycle and retains ownership while making it available to a director or employee.
VAT Recovery
If the company is VAT-registered and the bicycle is used for business purposes, it may be able to reclaim the input VAT, provided the normal VAT recovery rules are satisfied.
VAT on certain accessories may also be recoverable, including:
- Lights
- Locks
- Helmets
- Protective equipment
Recovering VAT can reduce the overall cost of purchasing the bicycle.
Capital Allowances and Corporation Tax Relief
The cost of the bicycle, excluding any recoverable VAT, may qualify for capital allowances.
In many cases, businesses can claim relief under the Annual Investment Allowance (AIA), allowing the cost of the bicycle to be deducted from taxable profits in the year of purchase, subject to the relevant rules and limits.
This can provide significant corporation tax savings.
When Does the Benefit-in-Kind Exemption Apply?
Providing employees with company assets can often create a taxable benefit. However, an exemption is available for company-provided bicycles if specific conditions are met.
According to HMRC, the following conditions must be satisfied:
- Ownership of the bicycle must remain with the company.
- The employee must use the bicycle mainly for qualifying journeys.
- The bicycles must be available generally to employees.
If these conditions are met, there will generally be no benefit-in-kind charge.
What Are Qualifying Journeys?
Qualifying journeys include:
- Travel between home and work.
- Business travel between workplaces.
The exemption also applies to electrically assisted pedal cycles.
Understanding the Main-Use Requirement
One of the key requirements is that more than 50% of the bicycle’s use must be for qualifying journeys.
Personal and leisure use is permitted, provided it does not become the bicycle’s primary use.
HMRC does not normally require detailed mileage records and generally accepts that the main-use requirement has been satisfied unless there is evidence to suggest otherwise.
Is HMRC Approval Required?
No formal HMRC approval is normally required.
The company simply purchases the bicycle and makes it available to employees or directors. However, employers should ensure that all statutory conditions are met to qualify for the exemption.
Option 2: Using the Cycle to Work Salary Sacrifice Scheme
The Cycle to Work scheme is the option most employees are familiar with.
Under this arrangement, an employee agrees to reduce their gross salary in exchange for the use of a bicycle provided by their employer.
Because the salary reduction takes place before income tax and National Insurance contributions (NICs) are calculated, both the employee and employer may benefit.
Benefits for Employees
Employees may save:
- Income tax.
- Employee National Insurance contributions.
Benefits for Employers
Employers may save:
- Employer National Insurance contributions.
National Minimum Wage Restrictions
For most employees, salary sacrifice arrangements cannot reduce earnings below the National Minimum Wage.
This restriction can limit the effectiveness of the scheme for lower-paid employees.
Is Salary Sacrifice Suitable for Company Directors?
Many company directors choose to pay themselves through a combination of salary and dividends.
Where a director receives a relatively low salary, reducing that salary through a salary sacrifice arrangement may provide limited additional tax savings.
In these circumstances, allowing the company to purchase and retain ownership of the bicycle may be a more tax-efficient solution.
Administrative Considerations
Compared with a straightforward company purchase, a salary sacrifice arrangement involves additional administration.
Employers may need to:
- Prepare a formal hire agreement.
- Record salary adjustments.
- Update payroll records.
- Maintain supporting documentation.
Businesses should consider whether the additional administrative burden outweighs the potential tax savings.
Understanding Bicycle Ownership After the Hire Period
Many employees eventually want to own the bicycle personally.
However, transferring ownership without following HMRC’s valuation rules could create a taxable benefit.
Employees who wish to keep the bicycle will generally need to pay its fair market value.
HMRC provides guidance and a simplified valuation table that determines the bicycle’s value according to its age and original purchase price.
When calculating the original purchase price:
Included:
- Bicycle lights.
- Bells.
- Other fixed safety equipment.
Not included:
- Helmets.
- Reflective clothing.
- Other wearable safety equipment.
Following HMRC’s guidance can help prevent unexpected tax liabilities.
Which Option Is Best?
For many owner-managed companies, allowing the company to purchase and retain ownership of the bicycle is often the simplest and most tax-efficient option.
However, the Cycle to Work salary sacrifice scheme can still be beneficial for businesses with multiple employees receiving standard PAYE salaries.
The best option will depend on:
- How the bicycle will be used.
- Whether there are multiple employees.
- The company’s payroll structure.
- The expected tax savings.
Frequently Asked Questions (FAQs)
1. Can my limited company buy me a bicycle?
Yes. A limited company can purchase a bicycle and make it available to a director or employee.
2. Can a company reclaim VAT on a bicycle?
A VAT-registered company may be able to reclaim VAT if the bicycle is used for business purposes and the normal VAT rules are met.
3. Will I pay tax on a company-owned bicycle?
Not necessarily. If the conditions for the benefit-in-kind exemption are satisfied, there will generally be no taxable benefit.
4. Do electric bicycles qualify for the exemption?
Yes. Electrically assisted pedal cycles are included within the exemption.
5. Can I use a company-owned bicycle for personal journeys?
Yes. Personal use is allowed, provided that qualifying journeys account for more than 50% of the bicycle’s use.
Final Thoughts
Cycling can provide significant financial, environmental and health benefits. When a bicycle is purchased through a limited company, the potential tax savings can make the arrangement even more attractive.
For many company directors and owner-managed businesses, company ownership is often the most practical solution. However, every business is different, and seeking professional tax advice can help ensure that you choose the most tax-efficient approach while remaining fully compliant with HMRC regulations.