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How to get a bike tax free!
What is the Cycle to Work Scheme?
The Cycle to Work scheme was introduced in 1999 to improve health and reduce pollution.
Under the scheme, your employer buys the bike, and then loans it to you whilst you make payments directly from your salary.
These payments are made before tax is taken, meaning you could save hundreds of pounds.
How does the Cycle to Work scheme work?
Under the Cycle to Work scheme, your employer can buy a bike and the necessary equipment to go with it.
The Government has removed the cap on the scheme, but each provider may impose their own cap.
50% of the use of the cycle must be for qualifying journeys, i.e. commuting to work, in order to qualify for the scheme.
This bike and equipment is then lent to you, and you pay installments over the next year.
These installments are taken out of your gross salary, meaning you don’t pay tax and National Insurance on the deducted amount.
This means that you could be saving up to 42% on the cost, depending on your tax rate.
At the end of the year, HMRC requires you to either pay a “fair market value” for the bike to keep it, or return it to your employer who can then keep it as a pool bike for employees to use.
The “fair market value” depends on the cost of the equipment. If it was over £500 then you must pay 25% to keep the bike, if under £500 you must pay 18% to keep the bike. If you do not pay this, then you will be liable for a Benefit In Kind charge, meaning you’ll have to pay HMRC extra tax.
Alternatively, some scheme providers allow the length of the loan to be extended by up to four years, and instead of paying either 18% or 25%, you pay a deposit that could be as low as 3%. If at the end of this term, you want to keep the bike then the scheme provider keeps the deposit. If not, you return the bike and they return your deposit.
The scheme also applies to one-person limited companies. The company will be able to claim the cost of the equipment as part of the annual investment allowance, reducing the Corporation Tax liability. If the employer is VAT registered, they can also claim the VAT back.
How much can i get for the Cycle to Work Scheme?
HMRC require at least the following percentages to be paid to avoid the Benefit In Kind charge.
For equipment under £500 the percentage is: after twelve months 18%, after eighteen months 16%, after two years 13%, after 3 years 8%, and after four years 3%.
For equipment over £500 the percentage is: after 12 months 25%, after eighteen months 21%, after two years 17%, after three years 12%, and after four years 7%.
What if i leave my job?
If you leave your employment during this period, the employer can take the bike back and keep it as a pool bike for other employees to use.
However, as the Cycle to Work scheme also covers equipment, and your employer is unlikely to want your sweaty cycling clothes back, you will be able to pay the remaining balance of the scheme from your final net salary, i.e. without the tax benefit.
How about and example?
Bradley works for the Stratosphere company. He is a standard rate tax payer, and gets £1,000 of equipment through the cycle to work scheme.
The amount taken out of his salary before tax will be £83.33.
As he would otherwise pay tax and NI on this figure, which total 32.8%, he is saving £27.33 per month in tax and spending it on the equipment.
Over the full year Bradley will spend £1,000 from his salary before tax. This means his saving, at 32.8%, will be £328, meaning he has only spent £672 on the bike.
However, at this point he will have to pay 25% of the original cost, or £250, to keep the bike. This takes his total to £922, a saving of £78.
If he decided to extend the loan by three years to four years in total, he would have to pay a deposit of 7%, or £70, instead of the £250. If he kept the bike after this period, he would only pay £742 and save £258 in total.
On yer bike!
If you want to take part in the scheme you need to find out which scheme your employer is enrolled in, and that will decide which shops you can get the bike from.
Then you need to request a certificate from your employer, which you can take to the bike shop and redeem against the equipment purchased.
The payments will start from your next pay packet.
Kind regards Ilyas