There’s no doubt that cycling has escalated in popularity in recent years. You won’t travel far on Briitsh roads today before you come across a MAMIL or Middle Aged Man in Lycra, enjoying a cycle ride.
Gold medals galore and the Grand Départ of the Tour de France in Yorkshire have certainly raised its profile. But when you also consider the benefits to the environment and the advances in technology, it’s no surprise that an increasing number of people are choosing this way to commute.
The Cycle to Work scheme, introduced in 1999 by the government as a tax exemption, means there are also financial benefits.
How it works
The schemes are usually provided through a third party. They allow employees to, in effect, ‘hire’ a bike by making payments from their gross earnings. As the name of the scheme suggests, the bike must be used to commute to work. You can’t select some fancy aero disc wheeled triathlon bike which you only race on a handful of times a year. The scheme does, however, also cover cyclists’ safety equipment as a tax-free benefit.
As part of the 12 month hire agreement, if you’re the employee, you fix a monthly payment of a twelfth of the price of the bike. It’s a form of salary sacrifice through which you save income tax and national insurance and the employer saves their NIC.
At the end of the agreement, you can:
return the bike to the scheme provider,
buy the bike outright for its market value, usually 18-25% of its original price
make a one-off payment, between 3% and 7% of its original value, to extend the hire period by another 36 months. At the end of the agreement, you can buy the bike for a price between 3% and 7% of its original cost. Most people opt for this option.
The tax position
The hire payment comes out of the employee’s gross pay each month.
As an example, if your bike was worth £1,000 and you were a basic rate taxpayer, it would cost you £820. If you were a higher rate or additional rate taxpayer, the figure would come down to £720 and £670 respectively. Even larger savings can be made on taxable incomes of £50,000 and above. Unfortunately, if you’re self-employed the scheme is not applicable.
What’s changed?
The scheme has been so successful in terms of take-up that the government decided in June of this year to expand it by removing the £1,000 limit on the value of the bike.
In the past, most employers stopped at £1,000 because a consumer credit licence was required for anything above that. With the majority of e-bikes costing in excess of this, it meant they fell outside the scope of the scheme. In the recent update, however, the government has announced that FCA authorised third party providers are able to run the scheme so the employer themselves does not have to be licensed.
You only have to look at the provision for cycling in other European cities to see why the UK is keen to widen the cycle to work initiative. In a competitive job market, offering the scheme can also help employers to differentiate themselves.