‘Bike tax’ generally refers to ‘motor cycle road tax’. The current rates of road tax for motor cycles from 1 April 2012 are as follows:
Motor cycle (with or without a sidecar) (Tax Class 17)
|Engine Size (cc)||12 months rate||6 months rate|
|Not over 150||£16.00||Unavailable|
In arriving at taxable pay, an employee can deduct expenses that he is obliged to incur and pay as holder of the employment and that are incurred wholly, exclusively and necessarily in the performance of the duties of that employment. Relatively few expenses satisfy this stringent rule. Others are specifically allowable by statute or by concession.
There is a statutory system of tax-free approved mileage allowances for business journeys in an employee's own transport. He is taxable only on any excess over the approved rates. Employers will report any such excess on the year-end form P11D or P9D. The mileage rate for motor cycles is 24p per mile (and the mileage rates for pedal cycles is 20p per mile).
If the employer pays less than these amounts, the employee can claim tax relief for the additional amount paid. The rates may be altered by the Treasury by means of regulations.
For National Insurance contributions, the NICs-free rates for motor cycles and cycles are the same as for tax.
‘Bike tax’ may also refer to the exemption from tax and NICs (subject to certain conditions) where employees are loaned bicycles and cyclists’ safety equipment by their employers.
Employers can also pay their employees for using their own bicycles on business travel, free of tax at a rate of 20p per mile. Where an employer pays less than this rate, employees can claim tax relief on the difference between the amount paid by the employer, if any, and HMRC's statutory rate.
To claim tax relief the employee should complete HMRC Form P87 after the end of the tax year.
Since 6 April 2005, if an employer loans and later sells a bicycle to an employee, this will not create a taxable charge provided that at least the market value is paid for the bicycle. Employees who are not the original borrowers of the bicycle are also able to purchase it under the same terms.
An employer can choose to set up a cycle to work scheme and loan bicycles and cyclists' safety equipment tax and NI free provided certain conditions are fulfilled, namely:
To take advantage of the tax and Class 1A NIC relief the employer can purchase the cycles and equipment and lend it to the employees. Should the employer wish to recover the cost of the loaned cycles and safety equipment it can be done via a salary sacrifice arrangement. The employee would give up the right to receive part of their cash salary under their contract of employment and receive a loaned cycle and safety equipment as a benefit in kind. As there is a tax exemption on this loaned cycles and safety equipment it does not have to be reported on Form P11D and is exempt from Class 1A NICs, therefore saving employee tax and employer NICs.
However, where bicycles and safety equipment is made available to employees under a salary sacrifice arrangement, VAT-registered employers must account for output VAT on the salary foregone. Input VAT is recoverable in the normal way.
Employers should make it clear to employees that if they do not use the cycle mainly for qualifying journeys, they may lose the benefit of the tax exemption. The employer can loan two cycles to one employee if they need one for either end of a train journey.
Safety equipment includes items such as:
There must be no automatic entitlement for the employee to be given the cycle at the end of the salary sacrifice period, but the employer can choose to sell it to the employee at a fair market value. Equally the employer may decide to allow employees continuing use of the equipment without transferring ownership. Where a loaned cycle provided to an employee under a salary sacrifice arrangement is transferred or sold to the employee at the end of the loan or salary sacrifice period, HMRC allow the value of the cycle to be determined using a simplified approach based on a percentage of its original cost. This recognises the fact that it is not always easy to ascertain the market value of a second-hand bicycle.