Cycle To Work Scheme
What is it?
The Cycle to Work scheme is a tax-efficient way to access a bike and related accessories for cycling to and from your place of work. It's part of the government's Green Transport Plan introduced in 1999. Your employer must partner with one of the Cycle to Work providers (have a look at the links below) to make this benefit available. Once your employer has done this you can then choose a bike and accessories. Your employer buys the cycle and accessories (or leases it through a finance provider); you then hire it all from them for a fixed period of time. After the hire period you may have the option to take ownership of it for the then fair market value; most employers choose to recoup the cost of the equipment through a salary sacrifice, which means you agree to sacrifice part of your salary to fund the hire of the equipment.
As a result of the great tax break and National Insurance savings typical savings range from 30-50%.
How does that save me money?
Firstly, as the equipment is deemed a business asset your employer can usually reclaim the VAT they paid on the purchase. Passing this saving onto you knocks a further 13% off the cost of the package.
Your employer will probably ask you to fund the equipment through a salary sacrifice, which means you agree to reduce your salary in return for using the bike. Since you would have paid Income Tax and National Insurance on the salary that you've given up, the amount of take-home pay you lose can be much less than the cost of the bike.
Of course it also means you can spread the cost over the period of the hire term, so the hire fees are easier to manage.
Your employer also no longer needs to pay National Insurance at 12.8% on the sacrificed salary, so there's a saving for them too.
How much can I save?
That depends on how much tax you're currently paying and your employer's VAT situation. A basic rate taxpayer could hire a bike for 60% of its price. If the market value after 12 months were 5% of the original value, you'd end up saving 45% and owning a £1000 bike for £650.
Here are the sums for a £1000 bike...
|The bike costs...||£1000.00|
|Your employer reclaims VAT at 15%...||£130.43|
|...and you agree to a salary sacrifice of||£869.57|
|Basic rate tax|
|You'd have paid income tax at 20%...||£173.92|
|...and National Insurance at 11%...||£95.65|
|...so your take-home pay reduces by||£600.00|
|Higher rate tax|
|You'd have paid income tax at 40%...||£347.83|
|...and National Insurance at 1%...||£8.70|
|...so your take-home pay reduces by||£513.04|
|Finally, you buy the bike for 5% of the original value||£50.00|
|If you have a Student Loan, your payments reduce by||£78.26|
|Your employer saves National Insurance at 12.8%...||£111.30|
The above examples are for guidance purposes only. The final figures will be affected by your personal tax circumstances.
- The bike must be used mainly for journeys between home and work. The taxman is unlikely to ask you to prove this, but if you work from home then they could ask how you're cycling to work.
- Nearly all employers will limit the scheme to bikes under £1000. They need to apply for a separate Consumer Credit Licence to run a scheme over £1000.
- Some employers, mostly public sector, can't reclaim the VAT they pay. In that case your salary sacrifice will have to cover the full price of the bike, but you'll still get the income tax and NI savings.
- You cannot add your own funds to increase the value of the equipment. So you need to be careful how much you sign up for.
What's the catch?
- If you leave the job for any reason, you'll have to pay off the remaining hire payments. You lose the tax exemption, so the remaining payments will be made from your net pay, after you've paid income tax and NI.
- The bike belongs to your employer; so don't get any ideas about selling it. However, you should insure it yourself - you'll still have to make the payments if it's damaged or stolen.
- The reduction in your salary might affect your eligibility for benefits such as incapacity benefit, maternity or sick pay, and the state pension. This is most likely to be an issue if the salary sacrifice brings your pay below £87 per week (the National Insurance Lower Earnings Limit).
- It might also affect things like mortgage applications that ask for your salary - it's largely up to the lender whether they use your original or reduced salary in their calculations, so check beforehand if you think this might affect you.
Great! How do I sign up?
Your employer needs to set up the scheme and arrange to buy or lease the bike on your behalf. Here are some companies that aim to make it as easy as possible for your employer to set up by taking care of most of the paperwork...