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What is the cycle-to-work scheme?
26 June 15 | By: Jas Jhooty
As part of the government’s green transport policy, employers can take advantage of the tax exemption for employer-loaned bicycles and cycling safety equipment. You can either create your own scheme or use one of the commercially run ones that are available.
What’s covered by the tax exemption?
The exemption applies to a bicycle and associated safety equipment, such as a helmet, as long as ownership of the equipment is not transferred to the employee, the bike is used mainly for home-to-work travel or travel between two workplaces and the scheme is offered to all employees.
Do employers have to monitor employees’ private use of the bike?
HMRC doesn’t expect employers to keep detailed records of the time spent travelling or the miles cycled to ensure that the “main use” test is met. HMRC accepts that this is the case unless there is clear evidence to suggest that less than half the cycling time is on qualifying journeys.
How do marketed cycle-to-work schemes work?
A typical scheme operates along the following lines:-
- the employee enters into a salary sacrifice arrangement with the employer – typically for twelve months
- the employer enters into a contract with the scheme provider
- the employee enters into a hire agreement for the loan of the bike with the scheme provider and is given a voucher for a bike package which is redeemed with that provider
- the employer meets the full retail cost of the bike (and therefore it’s the employer who owns the bike)
- at the end of the period, the employee can either hand the bike back to the employer, extend the scheme or buy it from the employer.
How much tax and NIC can be saved?
As the employee is swapping taxable salary for a tax-free benefit under the salary sacrifice arrangement, they save tax at their highest rate (20%, 40% or 45%) and also employee’s NIC on the salary foregone. The employer also saves the full cost of employer’s NIC.
Example of savings
A company has 24 employees, four directors and 20 staff. In 2014/15 it offers the use of company paid-for bicycles to all its employees for the main purpose of travelling to and from work. Six of the employees take up the scheme. Tony, one of the directors, for instance chose a bike costing £450, a cycle helmet – £80, and accessories – £90; a total cost to the company of £620.
As Tony’s annual salary is £95,000 he pays tax at 40%. He sacrifices £500 of his salary for use of the bike. Tony saves tax at 40% of this, i.e. £200, and NI of 1%: £5. The company saves employers’ NIc at 13.8%: £69.
After four years Tony wants to buy the bicycle, helmet and accessories which are then worth £80. As long as Tony pays the company no less than this for them he won’t have a tax or NIC bill.
Can employers deduct the cost of the bikes in calculating their profits?
The purchase of the bikes constitutes capital expenditure, and as such capital allowances are available. The full cost can be deducted immediately up to the annual investment allowance limit. Otherwise, writing down allowances are given at 20%.
What happens if the employee wants to buy the bike at the end of the agreement?
This is fine and there will be no tax charge as long as the employee pays the market value at that time. However, if they pay less than the market value, they will be taxed on the difference.
After say, a year, you can sell or give the bike to an employee. And while in the latter case this will count as a BiK, the amount chargeable to tax is quite small. HMRC even provides some guideline values.
How emTax can help
If you require any further advice on how to implement a cycle to work scheme or on any other employment tax related matter, please do not hesitate to contact us.