The Cycle to Work Scheme allows an employee to get a bike tax free. The scheme is open to any size employer and is operated via a salary sacrifice scheme.
To be eligible the bike must be used at least 50% for business purposes but can be used for non-business purposes too.
Here’s an example of how the savings work during the hire period, assuming the following:
- Employee is paid monthly;
- Employee is a standard rate tax payer requesting a £500 Certificate;
- The hire period is 12 months;
- The Employee’s monthly gross salary is £1,666.67 (£20,000 per annum).
| Salary before scheme participation |
Salary during scheme participation |
|
| Monthly Gross Salary | £1,666.67 | £1,666.67 |
| Bike value including VAT Gross salary sacrifice total |
£500.00 £500.00 |
|
| MONTHLY GROSS SALARY SACRIFICE = £500 / 12 months (this amount appears on the hire agreement) |
£41.66 | |
| Monthly Gross Salary after salary sacrifice Monthly NIC contribution (12%) Monthly income tax contribution (20%) Net Salary |
£1,666.67 £120.48 £189.00 £1,357.19 |
£1,625.01 £115.68 £180.60 £1,328.73 |
| MONTHLY NET SALARY REDUCTION | £1,357.19 minus £1,328.73 = | £28.46 |
| MONTHLY SAVING | £41.66 minus £28.46 = | £13.20 |
So, because the participants pay less income tax and NIC their NET salary reduction is less than the GROSS salary reduction, and this is how savings are achieved. In this example, the employee makes a £41.66 contribution to the employer, but it only costs them £28.46, resulting in a saving of £13.20 per month.
- Typical savings for employees are between 32% for basic rate taxpayers and 42% for high rate taxpayers.
- Employers can typically save 13.8% of the total value of salary sacrifice, due to reductions in Employers’ National Insurance Contributions (NICs) due.
- The Office of Fair Trading (OFT) has issued a group consumer credit licence to cover Employers implementing Cycle to Work Schemes that are limited at £1,000 inc. VAT per Certificate.
- During the hire period the bike is the property of the Employer.
- In order to preserve the tax benefits of the scheme, there can be no guarantee or obligation to transfer ownership to the employee immediately after the hire period has ended. However, employers generally choose to offer this option in addition to others, either directly or via the Cycle Scheme provider.