The Cycle to Work scheme is a great way for UK cyclists 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.
How does the Cycle to Work scheme work?
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.
Is there a limit for the Cycle to Work scheme?
Some local bike shops will happily sell you a more expensive bike for £1,000, as long as you make up the difference with them Image Source
For the first 20-years of the scheme it was widely assumed that your employer could buy the bike of your choice only up to a value of £1,000. However in June 2019 the Department of Transport sought to clarify that, in fact, if the bike shop you use or your employer is registered with the Financial Conduct Authority then you can choose a bike and equipment worth more than a grand.
The clarification was in response to the general increase in bike prices over the past two decades, but also in a bid to encourage more employees to switch to electric bikes — few of which cost less than a £1,000.
However much you spend the scheme works in the same way – 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 five 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?
There are some beautiful commuter bikes out there, such as this Foffa Joe Branston / Immediate Media Co.
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?