LCAG

A little known tax exemption allows employers to lend or hire cycles and cycle safety equipment to employees without the employee incurring any charge for tax or National Insurance Contributions (NICs).  There is a condition that the cycle is used ‘mainly’ for commuting to work, although you don’t have to keep records to prove it.

You might think that this is not very exciting news.  But this exemption can be implemented in a surprisingly tax efficient way that enables employees to purchase cycles through a carefully designed scheme that can knock as much as 50% off the cost of a bike, and at the same time save your employer money.

Sound far fetched?  This is how it works…

Choose a bike

Say you would like to buy a new bike costing £600.

Pay for the bike

Actually, your employer buys the bike, and you agree to accept a salary sacrifice of, say, £200 per annum for three years – £600 in total.  At the end of the three years, you buy the bike from your employer for its residual value to your employer, say, £50.

This is the clever bit

Because you are accepting a salary sacrifice of £600, you save the tax and NICs that you would otherwise have paid on the £600 that you have sacrificed.

If you pay tax at the basic rate, you save tax at 22%, plus NICs of as much as 11% (less if you are contracted out of the state second pension, perhaps because you are a member of your employer’s pension scheme).

Tax            £600 x 20%     £120
NICs           £600 x 11%     £66

Total saving                      £186

How much did that cost?

A £600 bike just cost you (£600 salary sacrifice, plus £50 residual value, less £186 tax and NICs) £464, a saving of almost 23%!

If your employer is VAT registered, and if you use the bike (even a tiny bit) on business, your employer can recover the VAT on the bike.  However, you would have to pay VAT on the £50 residual value.

In that case, a bike costing £600 including VAT – £510 plus VAT – will cost a basic rate taxpayer just £410.75 (£510 salary sacrifice, plus £58.75 residual value (inc VAT), less £158 tax and NICs), a saving of almost 32% against the VAT inclusive price of £600!

If you pay tax at 40%, the saving is even bigger.

Incidentally, you can include cycle safety equipment in the scheme, in addition to the bike itself as follows:

Cycle helmets which conform to European standard EN 1078
Bells and bulb horns
Lights, including dynamo packs
Mirrors and mudguards to ensure riders’ visibility is not impaired
Cycle clips and dress guards
Panniers, luggage carriers and straps to allow luggage to be safely carried
Locks and chains to ensure cycle can be safely secured
Pumps, puncture repair kits, cycle tool kits and tyre sealant to allow for minor repairs
Reflective clothing along with white front reflectors and spoke reflectors

Why would my employer do that?

You may wonder why your employer would pay £600 up front for a new bike for you, and only get the money back over three years.

The very good answer is that your employer can save as much tax as you!

This is how it works…

Pay for the bike

In addition to the £600 cost of the bike, the employer is also financing the cost which you only repay over 3 years.  Say the total cost is £650.

Savings for employer

Say your employer is a small but profitable company paying corporation tax at 19%, and is VAT registered.  Your employer will get tax relief (capital allowances) on the cost of the bike, and will save employer’s NICs on the salary sacrifice that you agreed to:

Capital allowances       £460 x 19%         £87
NICs                           £510 x 12.8%       £65

Total saving                                           £152

Large profitable companies pay corporation tax at 30%.  Individuals and partnerships may pay tax at as much as 50%.  The tax savings for such employers are even greater!

How much did that cost?

The bike cost £560 (VAT exclusive cost of £510, plus £50 finance costs) and you have paid your employer £560 in total by taking a salary sacrifice of £510 and purchasing the bike after 3 years for £50 plus VAT.  Net cost to the employer: £Nil.

But your employer has saved tax of £152.  Your employer ends up £152 better off, and you saved £190!

If you want, you can shed a tear for the tax man, who has financed this wonderful scheme.

The small print

As with all tax saving schemes, this has to be done right.  But why not ask your employer?

There are companies that will handle the details for an employer.

See www.cyclescheme.co.uk, www.evanscycles.com/ride2work,

www.cyclesolutions.co.uk or  www.edinburghbicycle.com.

If your employer wants to know the details, you could refer them to the following www.hmrc.gov.uk/green-transport/travel-plans.htm and www.dft.gov.uk/pgr/sustainable/cycling/cycletoworkguidance/

As we said, this is a little known scheme and most employers will likely know nothing about it.  However, if you are hoping to persuade your employer to operate the scheme for you, point them in the direction of Cyclescheme, Evans Cycles, Cycle Solutions or Booost who will take a lot of the hassle out of the process for them.

NB Electrically assisted pedal cycles are included in the scheme (NB This advice updated Nov 2009).

NB This advice was up to date as at November 2009.