Save a pretty penny with tax free bike schemes (BikeRadar)

Petrol prices are rising again, the cost of living is spiralling upwards and we’re all tightening our belts in a contracting economy. But if you live in the UK, there's one tax break that’s still worth pursuing: the Cycle to Work scheme, which can save you between 16 and 40 percent off the cost of a bike.

In essence, your employer buys a bike for you to ride to work, you ‘hire’ it through salary sacrifice (which is where you save, by not paying tax and National Insurance on the monthly fees) and at the end of the ‘hire’ period you buy the bike from your employer.

Over 400,000 people have already bought a bike on the scheme, which was introduced as a tax exemption in 1999 by the government to ‘promote healthier journeys to work and reduce environmental pollution’. The scheme has achieved that in spades, with a recent report claiming it saves the entire CO2 output of a city the size of Hereford each year.

Because it was set up to promote work journeys rather than cycling in general, your employer technically remains the owner of the bike. Everyone knows that in practice the employee is ‘buying’ the bike, but that isn’t legally the case until the salary sacrifice ends and the employer ‘sells’ the now heavily depreciated equipment to the employee.

Historically, few employers have bothered with the final sale transaction because it was a hassle, so many employees didn’t have to make a final payment. Despite recent changes in the scheme, providers OnYourBike say: “OnYourBike have always recommended continued use for no further payments at the end of the initial hire period. This remains unchanged and will continue to be our recommendation.”

How it works

Your employer buys the bike of your choice (up to a value of £1,000, unless they hold a Consumer Credit licence, which ups the maximum to £4,500), and you pay that back (minus the VAT, which most employers can claim back) over 12 months. Because payments are made from your gross salary you pay less income tax and National Insurance.

At the end of the 12-month ‘hire’ period, you buy the bike from your employer for its HM Revenue & Customs (HMRC) approved Fair Market Value (FMV). This is a change from the previous end-of-scheme payment, where you just paid 5% of the value of the bike to your employer, but various scheme providers have come up with ways to minimise the final cost of the bike. One is to extend the loan period past one year, thereby allowing one of the heavier depreciation figures to be used. The other solution involves paying the tax on the FMV.

The first solution has been engineered by the UK’s largest third-party scheme operator, Cyclescheme. It involves extending the loan period of the bicycle for a further three years, at which point the HMRC-determined fair market value is 3% or 7% (depending on whether the bike cost less or more than £500).

Because VAT is no longer added to the final purchase price, there are some instances where the employee is actually slightly better off with the new system than before. The new sweet spot is buying a bike for £499.99, thereby qualifying for the lowest (3%) FMV if you sign Cyclescheme’s Extended Use Agreement.

But even if you’ve opted for the maximum of £1,000, the savings are still considerable. This solution, which Cyclescheme co-founder Richard Grigsby claims is the result of extensive engagement with HMRC and the bike trade, is emerging as the preferred route for employers, probably because it takes away all the paperwork.

Too taxing? Other scheme providers take a different approach, which is to settle up with HMRC and pay tax on the FMV of the bike. So you pay 20% of the 25% FMV on a bike costing more than £500. For a £1,000 bike that’s £50. The downside is that your employer would have to enter the benefit on your P11D ‘Benefits and Expenses’ form for HMRC. Unfortunately, many employers may prefer to avoid this extra paperwork.

There’s a third possible route, which is to sign an extended use agreement for five or six years, meaning no final payment is due. This would deprive the scheme operators or employers of a cash windfall and leave the rest of us at least as well off as before, if not slightly better off.

Taking all that into account, the great news is that the scheme offers you between 16% and 40% off your next bike, depending on the implementation. Make sure you factor in that final transfer payment of 3% or 7% but, other than that, there are few relevant changes to the scheme, so get down to your local bike shop and start looking for your new commuting machine.

Insider info

You can have two bikes at once on the scheme if you ride to a station, take the train and ride again to your workplace. HMRC doesn’t force you to go for the folding bike solution.

You can claim 20p a mile in travel expenses when cycling for work other than commuting, but NOT if using a Cycle to Work bike, because the bike ‘belongs’ to your employer.

Employers who are unable to reclaim VAT – charities, universities, the armed forces and parts of the NHS – can’t take part in the scheme; instead they can use an external finance company, but the savings will be 5% less.

HMRC final market values

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