Want to know the ins and outs of the Cycle to Work scheme, how it saves you money, and exactly how much? It’s actually pretty complicated, so we called in finance guru Felicity Hawksley to spill the beans.
When the editor of Total Women’s Cycling gave me wine and then told me it was time to write an article about the Cycle to Work scheme, I got the strange feeling I’d been duped. Surely this was a puff piece they could cover themselves, without needing a finance journalist to handle it?
After a desperate reminder to GET A MOVE ON WRITING IT, I put the buck passing down to that unspoken law of journalism – “it’s not your fault, it’s just your turn”. Come 7pm, I dropped the thing I was reading about whether we should be redefining the concept of equity (?!) and opened my laptop ready to bash out 500 words on what happens if you want a bit of dollar off your next bike.
It’s now 10pm, I’m still here, still waist deep in tax legalese and now I totally understand why Kirsty wanted me to write this piece.
I guess I had better read you your rights …
What is it?
The Cycle to Work scheme was part of the 1999 Finance Act, a portion of which was designed to promote green transport. Generally, the idea is that you get your employer to buy you a bike, and then you sort of buy it back from them, at a saving.
How does it work?
Employers sign up to the scheme. Employees pick the bike and safety equipment they want, from the employer’s preferred supplier, and the employer pays for it – usually you have a coupon or a certificate to take to the shop.
The employer then leases the bike and equipment back to the employee, typically over a period of 12-18 months and the employee pays the leasing fee out of their monthly gross (before tax) salary. This is called, rather chillingly, a ‘salary sacrifice arrangement’, a phrase which makes me think that there should at least be a burnt offering at some point.
At the end of the leasing period, the employer allows the employee to buy the bike for a nominal (basically small) sum.
That just sounds like a loan to buy a bike…I’m sensing it’s not that simple. Where do the savings come from?
You’d be right, and in this case, it’s probably easiest to give a little bit of history. Business to business transactions don’t incur VAT – that’s a special joy reserved for customers only.
Back in the halcyon days, employers could buy the bike VAT-free and simply pass that saving on to you. Brilliant. The salary sacrifice you would make each month (out of your gross salary, remember) would reduce the amount of salary you pay tax and National Insurance on – a further saving, even more brilliant. And for your employer, there was a small saving on Employers’ National Insurance Contributions too – again, because the gross salary was lower.
This whole shebang resulted in savings of around 40-something percent, in many cases and sometimes 50-odd. Then, at the end of the lease period, you’d buy the bike at its yearling ‘market’ value – around 5% of its original price tag.
So what’s different now?
Following a ruling from the EU’s Court of Justice, salary sacrifice schemes are now subject to VAT. This means that employees will now pay VAT on the ‘value of the salary foregone’ – i.e. VAT on those payments made each month and VAT on the fee you pay to buy the bike from your employer. Don’t ask me why this happened. As far as I can surmise, it probably has something to do with Astra Zeneca, handbags and there being no such thing as a free lunch.
That’s not so bad…
Aha! The rules have changed on costing the bike at the end of the lease period, too. Again, this used to be around 5% of the original price, but apparently, the accounting world has moved on and HMRC, in their apparent vision-quest to cancel all fun, has expanded the parameters for calculating the ‘fair’ or mark-to-market value of second-hand bikes. You’re more likely to pay around 25% of the original tag now. You can find out more here, but it’s very boring.
Bum
Yes. Here’s a table to show you that whilst you can still save, it’s not the steal it used to be. But the bottom line is that there’s still a tax break, which means it’s still cheaper to buy a bike through the scheme.
| BASIC RATE TAXPAYER | Post-EU ruling | Pre-EU ruling |
| Certificate value | 1000 | 1000 |
| Gross salary sacrifice | 83.33 | 69.44 (incl. VAT 20% saving) |
| Income tax saving | 16.67 | 13.89 |
| National insurance saving | 10.00 | 8.33 |
| Net salary sacrifice | 56.67 | 47.22 |
| Overall saving | 320.00 | 433.36 |
| Overall saving % | 32% | 43% |
| HIGHER RATE TAXPAYER | Post-EU ruling | Pre-EU ruling |
| Certificate value | 1000 | 1000 |
| Gross salary sacrifice | 83.33 | 69.44 (incl. VAT 20% saving) |
| Income tax saving | 33.33 | 27.78 |
| National insurance saving | 1.67 | 1.39 |
| Net salary sacrifice | 48.33 | 40.27 |
| Overall saving | 420.04 | 516.76 |
| Overall saving % | 42% | 52% |
Table from Cyclescheme.co.uk
Astoundingly, I’m still awake after this soul-destroying tour round VAT – so what do I do if I’m interested in the scheme?
Well, here at Total Women’s Cycling, we believe that any bottom on any saddle is a good thing – so contact your HR department, or look on your intranet, or something equally intrepid. When I went hunting on the ‘benefits you can’t access because you’re a contractor’ part of the firm website, I found a rather jolly leaflet which explained who I could buy from, for how much and what I should do next. We’ve got the lowdown on the process here.
I can tell from your face that you’re not done talking about this – can I get a cup of tea first?
By all means – and being a benevolent sort of person, I won’t subject you to it here. If you want to find out why cycle to work scheme is weird, then you can read about it in an article I’m summoning the will to write.
