Get on your bike and save on your commute
If the uptake of cycling continues at its current rate, it's only a matter of time before we become a nation of two-wheelers. It's good for your health, it's environmentally friendly and it could be your new route to work. The commuter revolution is certainly one of the factors driving the growth in cycling as Lycra-clad businessmen and whippersnappers on fixie bikes ditch the train, bus or traffic jam.
Behind all this is the government's Cycle to Work scheme, an initiative that allows employees to save up to 42% on the cost of a new bike with help from their employer. The scheme saw a 7.9% increase in take-up during 2012, compared with 2011, taking the total number of people signed up to well over 500,000, including 2,200 bike retailers and 32,000 employers. Chances are if your employer doesn't already offer the scheme, it will soon.
How does it work?
Introduced by the government to encourage healthier trips to work and help take cars off inner-city roads, the scheme allows employees to get their hands on a bike at a substantial discount through a salary-sacrifice plan set up with their employer. The employee should use the bike mainly for commuting to and from work, or relevant work journeys, but this only has to account for at least 50% of the bike's purpose and other usage will not be monitored. So the employee is getting a bike they can use in and out of work for a decent discount.
The way the scheme works means the employer will actually own the bike and will loan it to the employee for an agreed period of time. The scheme is operated by a number of bike providers, though 90% of the market goes through the four members of the Cycle to Work Alliance: Cycle Solutions, Cyclescheme, Halfords and Evans. The remaining 10% of the market are smaller providers and independent shops.
Once an employer signs up with one of the providers, the floodgate should open for cycle-keen employees. They then visit a store signed up with the scheme their employer is with and pick a bike and any relevant safety equipment such as a helmet or reflective clothing, which are also covered by the scheme. There is a £1,000 limit, as set out by the Office of Fair Trading.
The process then varies slightly between providers, but, broadly speaking, you and your employer agree a loan deal, whereby the employer pays the cost of the equipment upfront and you agree to pay back the cost over an agreed loan period, normally 12 or 18 months, through salary sacrifice.
How do you save?
The salary-sacrifice repayments are where the employee saves money. As the salary sacrifice is taken from gross salary (before tax), you pay less income tax and national insurance (NI) because the salary that will be taxed is lower. The discount on the bike results from the savings you make on the tax you pay on your salary. The typical total saving is 32% for basic-rate taxpayers or 42% for higher-rate taxpayers.
Cycle Solutions offers additional 10% discounts on the value of the bike that could push your saving up to 39% or 48% respectively, and you might find similar offers from different providers.
Employers also typically save 13.8% of the total value of the salary sacrifice due to reductions in NI contributions. Steve Edgell, director of Cycle Solutions and chair of the Cycle to Work Alliance, says employers also benefit from the added value they're offering the employee: "It costs them nothing, but it gives added value to the employee and it helps the environment."
What happens afterwards?
The bike and equipment remain the property of the employer throughout the hire period, and it's not as straightforward as just walking away with it after you've paid back the value of the equipment. There are several options.
First, your employer could gift you the bike by completing a P11D form, though this would mean HM Revenue & Customs (HMRC) would classify it as a taxable benefit in kind and would charge the employer tax on the value of the equipment.
Second, the employee could return the bike, but "that would be a bitter pill to swallow, given the value of the bike has been paid," says Edgell.
Third, you could purchase the bike at market value, according to HMRC's devaluation table. Or, lastly, you could pay a 3% or 7% (for bikes valued less than or more than £500 respectively) continuation deposit to the provider that allows you to keep using the equipment.
Edgell says the last option is the most attractive as it gives the employee the freedom to keep using the bike for a small fee for an agreed period of up to 36 months, refundable if the employee wishes to give up the bike at the end - though providers will charge a fee to take the bike back. If the employee wishes to keep the bike, the deposit is forfeited and the bike becomes theirs.
But beware that if you leave your job or are made redundant, the hire agreement is non-cancellable following a cooling-off period of seven working days, so you would still have to pay the full amount of salary sacrifice, without the tax exemptions, until the loan is repaid.
What you save on a £500 bike
For a £500 bike, paid for over 12 months, as a basic-rate taxpayer your saving will be £160, or 32%. Your salary sacrifice will be just over £41 per month but because of the reduction on your gross salary, you'll save around £13 each month on the cost of the bike through national insurance (NI) and income tax savings.
As a higher-rate tax payer, your income tax and NI rate is higher, so you will benefit more by paying less of it. Accordingly, your saving on a £500 bike will be 42%, or £210. If you want to keep the bike at the end of the hire period, it will cost a 7% continuation deposit - as the bike is worth £500 or more - of £35. Add that on to the cost you've already paid and the bike will be yours for just under £375 as a basic-rate taxpayer or £325 as a higher-rate taxpayer.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The period of time you’re allowed, after signing an agreement, to cancel it without incurring a financial penalty. Financial products including banking, credit, insurance, personal pensions and investments are subject to a 14-day cooling-off period (this is 30 days in the case of life insurance and personal pensions). The insurer or broker must refund any money paid by you within 30 days, although it has the right to deduct a reasonable admin charge, and a sum proportionate to the number of days’ cover you had. If you have any related credit agreements, these will also be cancelled.