How To Save Tax By Buying A Bike Through Your Business

Summary: 

What it is: Providing conditions are met, HMRC allows companies to buy bikes and safety equipment and lend them to the directors and other employees of the company free of charge with no taxable benefit in kind. 

Approximate tax saved: This can save you thousands in tax if you were going to buy a bike anyway. In this example, we show how you can save £2,690 in tax. Actual savings will vary depending on your individual circumstances. 

HMRC reference: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21664

Here’s how it works: 

Companies are allowed to buy bikes and safety equipment and lend them to the directors and other employees of the company. 

For the benefit of doubt, according to HMRC's Employment Income Manual EIM21664, bicycles can also include electrically assisted pedal cycles such as a VanMoof (or other reputable brands). 

Safety equipment includes things like helmets, bells, panniers, locks, pumps, repair kits and reflective clothing. The only things that do not count as safety equipment are cycle computers, waterproof clothing that is not reflective and cycle training.

The best part is that for small businesses, buying a bike will be classed as capital expenditure that qualifies for the Annual Investment Allowance (AIA), which effectively means the entire cost will qualify for corporation tax relief. This is providing that the bike is loaned to the employee (i.e. you) for free and not leased or hired to them.

This is a huge benefit if you’re a director of your own limited company and are thinking about buying a bike to use for business travel. It could end up saving you thousands. 

How the tax saving works: 

Buying the bike personally

If you purchase a bike personally, one benefit is that you would be able to claim mileage for the business miles you do at 20p per mile (and it couldn't be easier to claim in Mighty!). We cover claiming business mileage (not just for bikes) in another blog here.

However, the downside is of course, you'll have to use your own personal money. Let’s assume you want a fancy new e-bike that costs £2,500 plus VAT at 20%, that’s a total of £3,000. 

If you wanted to make this purchase personally and are already a higher rate dividend tax payer, you would need to take a further £4,528 of dividends out of the company so that after paying £1,528 of Income Tax at 33.75%, you would be left with the net £3,000 you need to buy the back. 

So, in effect, the total cost if you buy the bike personally would be £4,528. Make sense so far? Good. 

Buying the bike through the business

On the other hand, if the company buys the bike, you won't be able to claim any mileage. However, if you are VAT-registered and not on the flat rate scheme, you will be able to recover £500 in VAT, leaving a net cost of £2,500 on which you will get Corporation Tax relief. 

In this case, let’s assume you pay the marginal 26.5% corporation tax - giving you total corporation tax relief of £662.50 (£2,500 x 26.5%). 

This means the net, after tax, cost of the bike is now just £1,837.50. vs £4,528 if buying it personally. 

To be exact, that’s a 55.2% saving - equivalent to £2,690 of tax saved. The difference is phenomenal! 

The rules: 

If that saving isn’t enough, according to HMRC's Employment Income Manual EIM21664, this benefit will also be exempt from Income Tax and National Insurance providing:

1. The bicycle is loaned and not given to the employee.
2. The bicycles and equipment are available generally to all employees if they want to start cycling. If you’re a company director and the only employee in your company, this still counts.
3. The employees use them mainly for “qualifying journeys"

Unlike driving a car to work, qualifying bike journeys do include journeys between your home and workplace. 

They also include journeys on a normal working day from your workplace to shops and other amenities where the return journey is no more than 20 miles.

Even better, the bicycle can also be used for leisure purposes within reason, including by members of your family, providing this is not the main use of the bicycle.

To make things easy, employees are not expected to keep detailed records of their journeys (as would be required with mileage claims for personal bikes) and HMRC will not challenge whether you are entitled to the exemption, unless there is clear evidence to suggest that less than half of the use of the bike or equipment is on qualifying journeys. 

How do you claim this in Mighty? 

Claiming this allowance in Mighty is incredibly easy as we have a bookkeeping categorisation for bicycles. Mighty will automatically claim all corporation tax and VAT relief for you (if you’re VAT registered and not on the flat rate scheme). 

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