Petrol prices are rising again, the cost of living is spiralling upwards and we’re all tightening our belts in a contracting economy.
But if you live in the UK, there’s one tax break that’s still worth pursuing: the Cycle to Work scheme, which can save you between 16 and 40 percent off the cost of a bike.
In essence, your employer buys a bike for you to ride to work, you ‘hire’ it through salary sacrifice (which is where you save, by not paying tax and National Insurance on the monthly fees) and at the end of the ‘hire’ period you buy the bike from your employer.
Over 400,000 people have already bought a bike on the scheme, which was introduced as a tax exemption in 1999 by the government to ‘promote journeys to work and reduce environmental pollution’.
The scheme has achieved that in spades, with a recent report claiming it saves the entire CO2 output of a city the size of Hereford each year.
Because it was set up to promote work journeys rather than cycling in general, your employer technically remains the owner of the bike.
Everyone knows that in practice the employee is ‘buying’ the bike, but that isn’t legally the case until the salary sacrifice ends and the employer ‘sells’ the now heavily depreciated equipment to the employee.
Historically, few employers have bothered with the final sale transaction because it was a hassle, so many employees didn’t have to make a final payment.
How it works
Your employer buys the bike of your choice up to a value of £1,000, and you pay that back (minus the VAT, which most employers can claim back) over 12 months. Because payments are made from your gross salary you pay less tax and National Insurance.
At the end of the 12-month ‘hire’ period, you buy the bike from your employer for its HM Revenue & Customs (HMRC) approved Fair Market Value (FMV).
This is a change from the previous end-of-scheme payment, where you just paid 5% of the value of the bike to your employer, but various scheme providers have come up with ways to minimise the final cost of the bike.
Because VAT is no longer added to the final purchase price, there are some instances where the employee is actually slightly better off with the new system than before. The new sweet spot is buying a bike for £499.99, thereby qualifying for the lowest (3%) FMV if you sign Cyclescheme’s Extended Use Agreement.
But even if you’ve opted for the maximum of £1,000, the savings are still considerable. This solution, which Cyclescheme co-founder Richard Grigsby claims is the result of extensive engagement with HMRC and the bike trade, is emerging as the preferred route for employers, probably because it takes away all the paperwork.
Too taxing? Other scheme providers take a different approach, which is to settle up with HMRC and pay tax on the FMV of the bike. So you pay 20% of the 25% FMV on a bike costing more than £500. For a £1,000 bike that’s £50.
The downside is that your employer would have to enter the benefit on your P11D ‘Benefits and Expenses’ form for HMRC. Unfortunately, many employers may prefer to avoid this extra paperwork.
There’s a third possible route, which is to sign an extended use agreement for five or six years, meaning no final payment is due.
This would deprive the scheme operators or employers of a cash windfall and leave the rest of us at least as well off as before, if not slightly better off.
Taking all that into account, the great news is that the scheme offers you between 16% and 40% off your next bike, depending on the implementation.
Make sure you factor in that final transfer payment of 3% or 7% but, other than that, there are few relevant changes to the scheme, so get down to your local bike shop and start looking for your new commuting machine.
Contact us to find out more about the different schemes we offer.