How the scheme works
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Using a Cycle to Work scheme, your employer can help you obtain a brand new bike and safety equipment worth up to £ 1,000. You can use a salary sacrifice arrangement to pay for the bike monthly and that means you can save around 40% of the retail price of bike and equipment. Your employer also gets a tax break to encourage them.
How the tax break works
To qualify for the tax breaks it's necessary to follow the taxman's rules which stated briefly are:
Your employer can loan (in fact hire) you a bike to cycle to work and no tax is payable by you on the value of this benefit in kind. As well as mainly cycling to work you can use the bike for other purposes and there is no requirement for you to keep a record of how the bike is actually used.
You accept a salary sacrifice (salary reduction) for the period of the hire. Because this is a reduction of your salary it reduces the total amount of tax and national insurance contribution you pay.
Your employer can reclaim the VAT content of the bike purchase price and, since VAT isn't payable on salary, they can pass that 20% saving on to you.
Together all of this means you obtain a brand new bike for up to 40% less than the retail price. You can see this calculation in the tables on the next page.
Now for the clever bit! The tax rules state that the bike must remain the property of your employer for the period of the hire and that there can't be an automatic right for the ownership to transfer to you at the end of the hire period. If there is, then the tax break for both you and your employer is lost.
To minimise the tax liability at the end of the scheme you and your employer have two choices:
- You can enter into a free loan agreement for the bike. Your employer simply lends you the bike for another four years at no cost to you. After this period you can buy the bike for token sum such as £5.
- Or your employer can simply give you the bike and declare the value as a benefit in kind. HMRC have a table setting out the values they will accept for second-hand bikes. If your bike originally cost £1000 then your employer would declare a benefit in kind of £208 and if you're a lower rate taxpayer you will pay £41 in tax and you will own the bike. The good news is you don't have to find the £41 because the taxman will simply adjust your tax code and recover it over the next year. All very simple and straightforward.
For more information on either method click here.
So you get: a great bike, an excellent way to lose weight and get fit, to save money on commuting, to ignore petrol price rises, the fun of riding the bike and a tax break! Thanks Gordon! (He was chancellor when this benefit was introduced, which probably explains why it's so complicated!)
You can see the figures on the next page.