How to save a packet on your annual bus ticket to work

How to save a packet on your annual bus ticket to work

Commuters can save up to 41% on their travel costs thanks to a newly discovered tax loophole. But the journey has to be by bus - this money-saving deal does not work on trains, tubes or trams.

The initiative, pioneered by Milton Keynes-based employee benefits consultants P&MM, works through a "salary sacrifice" scheme. The bus fare is paid from your gross income before tax and national insurance is taken out.

Salary sacrifice schemes are better known for purchasing bicycles through the cycle2work scheme, or for childcare vouchers.

Your salary is cut each month, as your employer effectively buys the item for you. A top-rate taxpayer gets £59 less in salary for each £100 worth of annual bus pass bought on his or her behalf, while a basic rate employee effectively pays £67.

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Employers also gain. They save 12.8% national insurance on the pay which is foregone. A typical employee who is paying a higher tax rate will save £184.50 on a £450-a-year bus pass, while the employer will save £57.60 on the national insurance.

Using salary sacrifice for a bus pass exploits a little-known clause in the Transport Act 1985 which allows firms to offer employees tax-free bus travel to work on company buses.

"That never took off," says Richard Davies at P&MM. "It was designed for the distant past. But we have re-engineered it as greentravel2work."

The first to benefit will be the 12,800 employees of Nottingham city council who will save 33% or 41% on annual passes originally costing £350 to £630. Big firms in Leicester and Portsmouth will also offer the scheme.

"We start with major employers and then work down," says Davies. "We also deal with bus companies."

However, it only applies to bus travel - even though areas such as Nottingham and London now integrate trams into their bus ticketing networks.

"We are talking to the tax people about this. It is considering extending this to trams at least. But for the moment, it's only buses - and only for journeys of 15 miles or under."

· HM Revenue & Custom wants to clamp down on tax-free taxi journeys home such as those late at night or for female staff, according to accountants UHY Hacker Young. If HMRC gets its way, the accountants claim, the tax concession will only apply where there is no public transport. Yet many cities now have all-night buses, they say.

t.levene@guardian.co.uk

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