The Cycle to Work Scheme Explained
The New Year’s resolution is an age-old tradition whereby, at the start of a new calendar year, people set themselves a goal (or sometimes multiple goals if they are feeling particularly greedy), be it changing an aspect of their lives or perhaps achieving an objective. Invariably, the life-span of the average New Year’s resolution is similar to that of the common housefly, and come 1st February, all but the committed few have long given up on the goal(s) that they were so excited about just a few short weeks ago. However, if your resolution is the commonly chosen “do more some exercise”, then we here at Howlader & Co have a solution which might just help you to see your goal through to the end of the year (or at the very least, February) – and that solution is the Cycle to Work scheme. “What’s that?” I hear you ask! Well, quite coincidentally, the rest of this blog is dedicated to answering exactly that question, so please read on and all will be revealed.
The Cycle to Work scheme allows employers to purchase and then loan cycles and cycling safety equipment to employees as a tax-free benefit, and it was introduced with the aim of promoting healthier journeys to work and reducing the environmental pollution created by more popular means of commuting such as the car.
One of the more common mechanisms that employers use to offer the Cycle to Work scheme to their employees is called a salary sacrifice arrangement. Such an arrangement involves the employee agreeing to accept a lower salary in return for the employer’s agreement to provide some form of non-cash benefit, which in this case is the loan of a cycle and or cycling safety equipment.
From the perspective of an employee, the main advantage of the scheme is that the benefit (i.e. the use of the cycle) is tax-free, whereas the salary foregone would be subject to income tax and National Insurance contributions (NIC). Therefore basic rate and higher rate tax payers can save up to 32% and 42% respectively on the cost of the loaned equipment. The loan agreements are for a fixed period, at the end of which the employee can be offered the opportunity to buy the equipment at a ‘fair market value’*, which varies depending on the cost of the equipment and its age.
In the example below, an employee earns £28,000 per year, and would like to buy a bicycle that costs £400. The two calculations show how much money the employee is left with after buying the bicycle themselves and then by using the Cycle to Work scheme. Note – Income tax & NICs based upon 2015-16 tax year.
In this example, the employee is £128 better off by using the scheme (equal to 32% of the cost of the bicycle). It is important to note that if an employee uses the scheme and wants to keep the bicycle at the end of the loan period, then they may have to pay some money to their employer, which would reduce the savings offered by the scheme.
As an employer, there are a number benefits of offering the Cycle to Work scheme to your employees. These include:
- Reduced Secondary Class 1 NICs if the loan is offered via a salary sacrifice arrangement
- The ability to treat the cost of cycles and cyclists’ safety equipment (that are loaned to employees) as capital expenditure and thus claim capital allowances
- A more attractive benefits package that can be promoted to potential recruits
- Improved health and wellbeing of participating employees
- A reduction in the company’s carbon footprint
Employers can set up and run the scheme themselves, or they can use one of the many third-party providers that will process the paperwork and supply the employee with the Certificate that they use to purchase their cycle and equipment.
*Fair Market Value matrix