The Government has changed the “tax-free bike scheme” which has been developed in response to the “Green Transport Plan”.

Basically the employer buys a bike and hires it to the employee until it has been paid for. The repayments are made from pre-tax rather than post taxed income.

The scheme enables employees who are basic-rate taxpayers to save 40 per cent of the cost of a bicycle, and higher-rate taxpayers can save 50 per cent. When introduced in 1999, the scheme required employers to apply for a consumer credit licence, but this bureaucratic hurdle has now been removed.

Under the scheme, the employer buys the bicycle (reclaiming the VAT on the purchase) and leases the bicycle to the employee. The employee pays an agreed amount each month out of gross (pre-tax) earnings, thereby reducing the income tax and National Insurance contributions. Then, at the end of the agreement (typically, between one and three years), the employee can buy the bicycle for a nominal amount.

The scheme only applies to employees of companies, if you are self-employed the bike could probably be claimed as a business expense, if you use it for business purposes.