Cycle to Work Scheme

Now that the Olympics are all over and given the fantastic success team GB had in the Velodrome I thought I would get back on my bike after a rather long hiatus. Unfortunately the long lay off had not been too kind on my bike so it got me thinking about purchasing a new one. As always I started looking at the best deals out there and quickly found the Cycle to Work scheme which any employer can offer to its employees who are paid through the PAYE system to purchase a bike and equipment. It should be noted that the scheme is not open to the self employed.

Now although the Cycle to Work scheme is a cheap way of getting a bike, a bit more on that later, it is also a great way to get more people into this very rewarding activity and hopefully can get more cars off our already congested roads. Further I am always a keen believer in a fitter and healthier workforce will reap rewards for employers.

So to the savings, in essence the scheme works as a salary sacrifice where the employer will purchase the bike and then this “amount on loan” will be repaid by the employee over a pre-determined period of time. This does not initially sound particularly appealing until you realise that the repayment will be taken off your salary before any tax is deducted, thus saving yourself Income tax and Employee’s National Insurance at your applicable rate, as well as saving the employer the National Insurance on this repaid amount, so everyone is a winner. It is very important to note here that the salary sacrifice cannot take the employee below the National Minimum Wage (NMW) as the employer would be in breach of the NMW legislation.

When the hire period ends (usually after either 12 or 18 months) the employee gets a few options, they can either:

  1. return the bike;
  2. pay an ownership fee based on the value of the bike;
  3. sign an Extended Use Agreement up to another 36 months and then pay an ownership fee.

The ownership fee, which cannot be salary sacrificed, is dependent upon the age of the bike and the equipment as follows:

Original cost
Age Less than £500 Over £500
12 months 18% 25%
18 months 16% 21%
2 years 13% 17%
3 years 8% 12%
4 years 3% 7%

Option 2 is undoubtedly the most expensive but means that ownership of the bike passes to the Employee, with the cheaper route of number 3 this ownership transfer is delayed until the end of the Extended Use Agreement.

Putting the above into an example: if an employee in the higher rate of income tax purchases a bike worth £1,000. Over the initial hire period of say 12 months the employee will save tax at 42% ie £420 however at the end of this period the employee has an option as noted above:

  1. If they wished for the bike to be transferred to themselves immediately they would need to pay 25% or £250, in total saving £170 or 17%.
  2. If they were happy to wait for ownership to transfer after a further 3 years, they would need to pay 7% or £70, a total saving of £350 or 35%, at the end of the extended term.

Obviously these figures do not take into account any fuel saving that would be made in cycling to work rather than driving as this is entirely dependent upon what car an employee drives.

The VAT on the purchase of the bikes can be reclaimed by the employer, however output VAT needs to be accounted for on the monthly “rental” and the final sale to the employee.

So far so good but there are still a few things that need to be considered before going down the Cycle to Work route:

  • The Employer must be registered with HMRC under the Cycle to Work scheme.
  • Not all bike manufacturers offer bikes through the Cycle to Work scheme so it is best to check first before purchase.
  • The limit of a package is usually £1,000 but authorisation can be sought from the OFT to exceed this amount.
  • Ownership of the bike and the equipment will sit with the employer throughout the term of the contract until the final payment is made.
  • The main use of the bike should be for qualifying journeys i.e. between home and a workplace.

From the above it can be seen that the Cycle to Work scheme is a good way of getting more people involved in the activity and hopefully although winter is looming we can get on our bike and make some savings at the same time.

Please contact your Barnes Roffe partner if you would like any further guidance on the Cycle to Work scheme.

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