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Today’s article is written by a friend of moneystepper, Justin Januszewski. With plentiful experience in the cycling arena, including cycle to work scheme purchases with two separate employers, he is perfectly placed to share his knowledge on whether the cycle to work scheme is worth it, and what potential savings are possible. Enjoy.
What Is The Cycle To Work Scheme?
Here in the UK, forward thinking businesses with an eye on employee wellbeing have long been extolling the virtues of the Cycle to Work Scheme. The scheme was introduced by the government in 1999 and allows businesses to loan cycles and equipment to employees as a tax free benefit via salary sacrifice.
But what does this mean in practice and how does it actually save you money? Let’s walk through the elements of the scheme and the pros and cons to answer if the cycle to work scheme is worth it.
How Does The Cycle To Work Scheme Operate?
The scheme allows you to choose a bike from a participating shop. Which shops will depend on your employer and the scheme provider they’ve partnered with. For instance, some schemes include a number of different shops including small independents whilst with others you’re limited to just one large retailer.
You can choose a bike and any equipment associated with your cycle to work. This could be lights, bags, clothes and the all important helmet (Ed, feel free to add personal comment!). In fact, pretty much anything other than food. The total value of both bike and equipment is usually capped at £1,000, as beyond this amount businesses have to apply for an additional credit licence.
Select the bike and equipment you want from the participating bike shop and request a cycle to work quotation. When you get back to work, you can then request a certificate for the total value via the process your employer will have in place. Once your certificate comes through, simply head back to the shop, hand the certificate over as payment and walk out with your new ride.
Now, over the next 12 months, your employer will deduct the amount of the certificate from your pay over 12 monthly instalments – before Income Tax and National Insurance.
Sounds simple enough, but what happens at the end of the 12 months and how do you save money?
Is Cycle To Work Scheme Worth It?
First off, you’ll have a nice, shiny new bike (and any equipment) right away without having to initially spend a penny or save your pocket money. You’ll be paying for it in monthly instalments which will help your cashflow.
But the main benefit is that you’ll be making your monthly payments through a pre-tax salary sacrifice arrangement. This means you won’t pay tax and NI on these amounts and will therefore save this money. Compare this to a situation where you are paid a monthly salary from which tax and NI is deducted and then paying this over to finance company or saving it for a bike.
Technically speaking, your employer is leasing the cycle to you for the duration of the agreement (usually 12 months). In order to protect the tax benefits of the scheme your employer can’t guarantee or commit to transferring the cycle to you at the end of the agreement. So in theory your boss may ask you to hand back the bike at the end of the year. This may sound like an immediate turn off, however employers generally choose to transfer ownership at the end of the hire period and there’s no real incentive for them not to.
The flip side of this is that you do have the option to hand the bike back if you don’t want it at the end of the year.
End Of Loan Period
Things get a little complicated at the end of the hire period, and your options are dictated by the following table of final market values issued by the HMRC in 2010:
|Age of bike||Final market value|
|Bikes under £500||Bikes over £500|
|6 Years & Over||Negligible||Negligible|
Based on these values, you have the following options after the initial 12 month hire period:
- Hand the bike back.
- Keep the cycle and pay your employer a fair market value payment for the value of the bike and equipment, being 18% or 25% of the value of the bike, per the table above.
- Sign an ‘Extended Use Agreement’ to keep using the bike for another 36 months and pay a much smaller fee of 3% or 7% of the certificate value based per the table above. This means greater savings, but it also means that you won’t technically own the bike for another 3 years.
- Receive the bike as a benefit in kind – your employer may choose to “gift” the bike to you at the end of the 12 months (or later if you extend the agreement), especially if they want to maximise employee savings and ensure ownership is transferred in the least possible timeframe (your employer probably doesn’t particularly want bicycles on their balance sheet). The cost to you here will be the tax on the benefit.
- Extend the agreement even further, to 5 or 6 years. This means a nil or 2% final payment is due per the table.
Other than the ownership implications, the main difference in each of these options lies in the savings you’ll receive through the scheme.
Savings Through The Cycle To Work Scheme
In the calculations below, I’m going to consider a bike and equipment to the value of £700. The rationale for this is that I would want to spend over £500 on a “good” bike, and use at least £100 on a lock, helmet and lights as a minimum.
Tax and NI
The savings you’ll make will mainly be through the tax and NI you’ll save through making your monthly payments before these deductions.
An analysis of all the options for tax and NI savings finds that:
- Higher rate taxpayers are better off, with an average saving of 36% compared to 26% for a basic rate taxpayer.
- Regardless of tax rate, you generally make the most savings for certificates up to, but crucially not including, £500. So the sweet spot is £499.
- The best option for all taxpayers is if you can extend the arrangement for as long as possible (six years or greater) and avoid paying any kind of balance at the end of the agreement. This amounts to a whopping 42% for a higher rate tax payer.
- For lower rate taxpayers required to pay the full HMRC balance at the end of 12 months, savings made based on tax will only be 7%.
So on a £700 bike and equipment package a basic rate tax payer could save up to £224 with options one and five, or as little as £49 on option two. For a higher rate tax payer this is £294 and £119 respectively.
How else could you buy a bike today without putting the money down first? Well, you could take out a loan to pay for a bike over 12 months in the same way. However, following this option, you’ll have to pay interest on your loan. Just as with car loans, take out finance on a bicycle if there is an interest rate to pay is usually not a good idea.
A quick search of major cycle shops finds the following finance rates:
- Evans Cycles – 9.9% APR (only on cycles valued at £499 or more, promotional 0% also available frequently)
- Halfords – Store by store basis
- Edinburgh Bicycle Cooperative – 0%
A search on moneysupermarket for an unsecured £1,000 loan over 12 months brings back a lowest rate of 16.1% for a new customer.
To take an average of these options for comparative purposes, we’ll assume a rate of 10% APR on the loan. Assuming a four year loan period, interest at this rate will amount to £231.70 on a £700 bike.
Lastly, cycling to work instead of using a car or public transport will save you big bucks. As demonstrated previously by the MoneyStepper, annual commuting costs for a car can cost up to £4,400 whilst public transport may be £958.
Other Things To Watch Out For
One thing to consider is that there are two ways in which your employer can obtain the bike on your behalf in the first place: they can either buy the bike outright themselves or they can obtain it from a third party leasing company. In the latter situation there will be some additional costs involved which your employer may choose pass onto you. These are the finance costs owed to the leasing company and a “transfer of ownership fee” if you choose options three or five above, which is £25 or 7% of the value of the bike, whichever the greater. These costs may reduce the amount of savings you’ll make. For example, for a basic rate payer on a bike valued at over £500 where the employee is required to pay the full HMRC fair value payment at the end of 12 months, that 7% saving will be completely wiped out by the transfer of ownership fee.
In addition, I’ve had personal experience of a scheme which left a bit of room for improvement in terms of practicality. Firstly, my scheme was limited to one well known bike shop which meant I couldn’t really shop around. As it happened, I got a great deal on a new bike so this wasn’t a big problem. However, other schemes I’m aware of are much more flexible.
Secondly, my scheme meant that I could only receive my certificate on January 1st, but I had to actually request the certificate as part of my employer’s flexible benefits package by the end of October the previous year. As I said, I got a good deal on my bike as it was in the sale. But this meant there was limited stock. So I found myself in a position where I had to gamble on there being the bike I wanted in stock two months later and request a certificate accordingly. Had there not been the bike in stock I would have had to settle for a far inferior bike (in my opinion!) for the same money. All ended happily in my case but potentially worth considering.
Lastly, when choosing a bike for my better half in another well known bike shop we found out that you could only use the scheme on full-price bikes, and not ones in the sale. This issue seems to be isolated to this one outlet but it certainly made a difference to the savings to be made.
Is Cycle To Work Scheme Worth It – Conclusion
Is cycle to work scheme worth it? Well, bringing everything together, let’s say I am a basic rate taxpayer living in Tynemouth and I usually commute to work in Newcastle by car, which is a good example to use because it is true! Assume also that I opt to spend £700 on a bike and equipment which I estimate I will need to replace in four years, and my employer gives me the option to extend the initial 12 month loan period for an additional three years after which time they will gift the bike to me as a benefit in kind. Costs over 4 years will add up as follows:
|Cost of bike and equipment|
|Less: tax savings over 12 months|
|Less: NI savings over 12 months|
|Total cost of bike over 12 months|
|Benefit in kind payment on residual value after four years|
|Total cost of bike over four years|
Now let’s say I purchased the bike through a finance agreement based on 10% APR:
|Cost of bike and equipment|
|Total cost of bike over four years|
So by going with the scheme I will have saved £539, which is 77% of the value of the bike!
I personally got my cycle to work scheme bike through Evans Cycles, as I had a wide choice of providers and Evans offers a fantastic range of good quality bikes. In my opinion, it is worth paying a little extra to get a bike that will serve you for longer, and Evans’ personal service and support is highly recommended.
If you want to check out their range of bikes, especially through their cycle to work scheme, and make the most of their seasonal discounts, then click the banner below:
“Cycle to work” is a great way to get out there on a bike for less: saving you money, improving your health and cutting CO2 emissions into the bargain. In conclusion, the cycle to work scheme is definitely worth it.
However, as you can see, the scheme can get a little bit complex. Just make sure you understand the scheme thoroughly before you enter into an agreement to make sure it will benefit you.