The 2016 autumn statement has just been announced, and the good news is that the Cycle to Work scheme remains unchanged. For UK cyclists, this is a great way to save up to 42 percent off the cost of a bike. Let's have a look at how it works and whether you're eligible.
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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. In other words, your salary sacrifice is made from your gross salary, not your net salary.
Hundreds of thousands of people have already bought a bike on the scheme, which was introduced as a tax exemption in 1999 by the government to ‘promote healthier journeys to work and reduce environmental pollution’.
Because it was set up to promote work journeys rather than cycling in general, your employer technically remains the owner of the bike once you finish the hire period. 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.
In the past, 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. However, that changed a few years ago with HMRC clarifying that bikes needed to be sold at Fair Market Value so as to avoid the scheme being a tax loophole.
Third-party providers, such as Cyclescheme, now usually offer a variety of options: pay a small refundable deposit to re-hire the bike for three more years (after which the bike is yours for free), pay the fair market value (normally about 18 percent or 25 percent of the certificate value of the bike), or return the bike.
How the Cycle to Work scheme works
Your employer buys the bike of your choice up to a value of £1,000, unless they hold a Consumer Credit licence, which ups the maximum to £4,500. We also found that some local bike shops will happily sell you a more expensive bike for £1,000, as long as you made up the difference with them. 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 income tax and National Insurance, hence making savings.
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 percent of the value of the bike to your employer.
However – as mentioned above – various scheme providers have come up with ways to minimise the final cost of the bike. One is to extend the loan period past one year, thereby allowing one of the heavier depreciation figures to be used. The other solution involves paying the tax on the Fair Market Value.
Do I have to ride My Cycle to Work bike to the office every day?
Relax – no one is going to be checking up on you to see how often you've ridden it. Of course, the idea is that it's used to ‘promote healthier journeys to work and reduce environmental pollution’, so using it as part of your commute is the obvious goal.
Why use the Cycle to Work scheme?
- You'll live longer – says the NHS
- It saves the entire CO2 output of a city the size of Hereford each year
- Cycling to work can help you burn between 75 and 670 calories a journey, obviously depending on how far your journey is (according to www.weightlossresources.co.uk)
- It'll make you feel happier, getting you outside in the sunshine boosting your levels of vitamin D
- You'll save money on commuting while also easing congestion
- And we've got at least another 30 reasons to take up cycling