Following on from our recent Travel to Work by Bike Report, which showed that there are around 700,000 cyclists in the UK that commute to work, we wanted to highlight the benefits for employers & employees alike on using the Cycle to Work scheme.
This obviously named bike scheme is a tax incentive developed by the UK Government to help people get fit, and to improve their health and reduce air pollution in the process.
The cycle scheme allows employees to benefit when buying a bike via long term bike loans. The scheme is also available when purchasing commuting equipment such as lights, locks and panniers – tax free.
Employers benefit from the scheme by having employees who are fit, healthy, punctual and as such, more wide-awake. Employees benefit by being fitter & healthier, but they also benefit from the moral high ground and the lower cost of commute.
From a financial aspect, an average tax-payer can save around 30-45 per cent, although this is a guide, not a rule. There are various calculators online to help you see how much you may be able to save, as an individual and as an employer. Try the one from Cyclescheme.co.uk first.
Cycle to Work Info for Employers
The original scheme was launched in 1999 but was renamed in 2005 to the Cycle to Work scheme.
Employers can loan bikes to their staff as a tax-free benefit on the condition that the bikes are mainly used to get to and from work or for work-related purposes. The employee buys the bike at the end of the load period for a nominal sum.
All employers are entitled to set up their own Cycle to Work scheme. However, creating such salary sacrifice schemes requires a working knowledge of employment law and the intricacies of the tax system. The paperwork is tricky to complete and there are pitfalls for the unwary such as falling foul of minimum wage requirements, credit licences and the redrafting of employee contracts.
As such, it is more common for employers to out-source the scheme to third-party companies who have more experience of the Cycle to Work scheme.
Cycle to Work Process
According to the Dept for Transport, the Cycle to Work scheme works like this;
- Your employer signs up for the scheme
- You choose a bike from an approved supplier
- The bike is then bought by your employer
- Your employer reclaims the VAT
- You then take delivery of the bike
- The VAT free price is then deducted from your salary by equal instalments over a period of time (typically 18 months), but as you don’t pay tax or NI on the income you forego, this will give you further savings
- After the period of salary sacrifice, the employer may give you the option to purchase the bike at a fair market valuation
The fair market value was formerly five percent of the original package price. So, after a 12 or 18 month loan period for a bike package costing £1000, the employee took full ownership for just fifty quid. However, a HMRC rule created in August 2010, states that for bikes of £500+ the FMV is set at 25 percent after one year, regardless of the secondhand condition of the bike.
The actual discount available to an employee will be based upon their own personal tax circumstances (higher tax payers get fatter discounts) and whether their employer can recover all VAT. Some public sector employers (such as the military), charities and some others may not be able to recover all the VAT.
Cycle to Work Scheme Example
Here’s an example of how the Cycle to Work scheme can work;
- An employee chooses to have the loan of a bike at a retail price of £450
- The employer reclaims the VAT, thus reducing the price of the bike to £383.30
- The employer and the employee agree a loan period of 18 months. As such, the £383.30 net amount is divided into 18 equal payments of £21.28 per month
- The employees actual monthly net cost will be £14.26 because there is no income tax or national insurance on the gross pay of £21.28
- At the end of the 18 month period, the employer offers the ex-loan bike for sale at a fair market value, say £50
- Thus, the cost to the employee is £256.68 (£14.26 x 18 months) plus £50 = £306.68
- In this example, the employee saves over 30 percent
Cycle to Work Scheme Providers
- Cycle Scheme
- Edinburgh Bicycles
- Evans Cycles
- Cycle Surgery
- Bikes for the NHS