In order to encourage healthier lifestyles and to help reduce environmental pollution the UK Government has introduced Cycle to Work Schemes. In addition to the health and environmental benefits of these schemes, they also provide financial benefits to both the employer and employees.
The key points of the Cycle to Work scheme are:
At the end of the hire period the employer can sell the bike and accessories to the employee for a nominal amount. Alternatively the employer can retain ownership of the bike and accessories and allow the employee to use the bike and accessories with no salary sacrifice.
Significant savings are available as a result of Government initiatives to encourage healthier lifestyles and to help reduce environmental pollution. Cycling to work is a key part of this initiative.
As a result an employer can provide a bike and related safety accessories to an employee for commuting purposes free of tax (PAYE) and NIC.
The employer can recover the cost of purchasing the bike and safety accessories from the employee by hiring the goods to the employee. The employee pays the hire charges through a salary sacrifice arrangement which results in a PAYE and NIC saving for the employee. Depending on the employers VAT status, the employer can also recover the VAT.
The employer also saves money as there is no Employers NIC to pay on the amount of salary sacrificed by the employee.
Salary sacrifice is a contractual agreement between an employee and employer where an employee receives a lower salary for an agreed period and in return receives a non-cash benefit from their employer (in this case the hire of a bike and related safety accessories).
The reduction in salary means your National Insurance contributions (and in some cases tax contributions) will be reduced.
As a salary sacrifice arrangement reduces an employee's gross salary there may be a knock on effect on other benefits. Although the effect on other benefits is likely to be small the employer should communicate any effects on other benefits to the employee. A salary sacrifice arrangement can potentially impact the following:
Savings for both the employee and employer vary depending on the rate of tax and NI the Employee pays.
A lower rate tax payer (paying 20% PAYE tax and 12% NI) would save approximately 32% off the normal Wiggle price.
A higher rate tax payer (paying 40% PAYE tax and 2% NI) would save approximately 42% off the normal Wiggle price.
Cycle to Work legislation allows for the purchase of up to 2 bikes on the scheme. Where for example; the 1st bike may be used between home and a train station and the second between the destination train station and work.
Safety equipment is not defined in legislation but the Department of Transport have indicated that it can include the following:
As the above list is not defined in legislation and has been prepared by the Department of Transport employers may wish to confirm with their local tax inspector that they agree with the guidance given.
Through the Cycle to Work scheme your employer is purchasing the equipment and providing this to you under a hire agreement. This allows you to benefit from the tax breaks made available by the government.
At the end of that hire period the employer has the option to sell the bike to the employee at fair market value.
The Inland Revenue have issued the following Valuation Table to help guide employers and employees into coming up with a realistic fair market value. The following table lists realistic % amounts. If ownership of the bike transfers for less, it is up to the employer to prove the reasons this has been done with photographs and other reasonable evidence to support the lesser % transfer - e.g. excessive use and wear. If a value of 10% is used and the Inland Revenue deem that it should be higher than this will result in a benefit in kind for the employee.
The valuation table
|
Age of cycle |
Acceptable disposal value percentage |
|
|
|
Original price of the cycle less than £500 |
Original price £500+ |
|
1 year |
18% |
25% |
|
18 months |
16% |
21% |
|
2 years |
13% |
17% |
|
3 years |
8% |
12% |
|
4 years |
3% |
7% |
|
5 years |
Negligible |
2% |
|
6 years & over |
Negligible |
Negligible |
How to use the valuation table
Note: This guidance is solely about a simplified method of calculating the value of used cycles in the context of taxable employment income and is not intended to have any bearing on the actual VAT position. Employers will need to refer to the appropriate guidance or seek advice on how to account for VAT on sales of used cycles.
In calculating the original price of the cycle, include safety equipment fitted to the cycle (such as lights and bells) but not safety equipment which would be worn by the cyclist (such as helmets or reflective clothing). Where used regularly for commuting and/or travel between workplaces, safety equipment worn by the cyclist is likely to have a market value that is lower than the table percentages for a cycle and cycle-based safety equipment.
The employee must mainly* use the bike and safety equipment for "qualifying journeys". A qualifying journey means a journey, or part of a journey, between an employees home and workplace or between one workplace and another.
As cycling only part of a journey is required, cycling to and from the station to get a train to work would qualify an employee for the scheme.
* mainly means more than 50% of the time using the bike and safety equipment must involve a qualifying journey. It is the responsibility of the employer to monitor this.
If the bike and safety accessories provided under the scheme are not mainly used for qualifying journeys then the employee may lose the benefit of the PAYE and NIC savings available through the scheme.
The employee is responsible for insuring the bike. Cover can normally be obtained through home insurance. The insurers should be advised that the employer has an interest in the bike.
If the bike is stolen whilst uninsured the employee will continue to be liable for any outstanding hire payments through the salary sacrifice arrangement.
If the employee takes unpaid leave, including maternity and paternity leave, the employer will normally extend the salary sacrifice period for the number of unpaid months. This extension to the period of the salary sacrifice arrangement is normally capped at 6 months.
The payment for the bike and safety accessories by the employee is formalised through a Hire Agreement regulated by the Consumer Credit Act. This is a non-cancellable legal agreement. The hire charges under the agreement are made through a salary sacrifice arrangement.
If the employee leaves his employment through any reason during the salary sacrifice period then the employer will normally require the employee to pay compensation. The compensation is generally the employer's costs which have not been offset due to the non-completion of the salary sacrifice arrangement.
This compensation payment will be taken from the employee's final net pay and will not qualify for the PAYE and NIC savings normally available.
This compensation payment may be viewed as a termination fee and should cover the fair market value of the goods in order to transfer their legal ownership from the employer to the employee.
There is no requirement to notify any authority and prior approval is not required. However once the Cycle to Work scheme has been established an employer may wish to check with their tax office that PAYE and NIC does not need to be accounted for any salary sacrificed.
