12th October 2010 Words: Rebecca Charlton Photos: Chris Catchpole
A new bike for less and no more racing for the last spot in the office car park — the benefits were clear. But then the taxman wanted in too…
We’ll admit that while we’ve always known the ‘bike to work’ scheme is a great idea, we were a little perplexed about some of the ins and outs of the process.
Since the initiative was born in 1999, under the Government’s Green Transport Plan, the benefits have become increasingly apparent, with friends, families and colleagues shouting about the fact that you could save up to almost 50 per cent on a shiny new bicycle. It had all become clear — should your employer offer the scheme, as far as we were concerned, it was a no-brainer. But then things got a little more complex.
In recent months there looked to be some changes, which may not be such good news for us commuters. Various new strands of information regarding ‘ride to work’ schemes emerged following an announcement from Her Majesty’s Revenue & Customs regarding ‘fair market value’ (FMV). There’s been plenty of speculation surrounding this announcement and what it would spell for schemes that have proven to be a godsend to cyclists all around the country. The question on everyone’s lips: would these new guidelines mean a smaller saving for the employee?
Wanting to find out, we went out and about to see what we could buy with our £1,000 voucher and how much things have really changed for the employee.
Cycle to Work explained
Cyclescheme, the UK’s number one provider of tax-free bikes for the Government’s Cycle to Work initiative, explains: “The cycle to work initiative is a salary sacrifice scheme, which gives you the chance to save on the cost of a new bike as well as security and safety equipment to go with it.
“The way ‘salary sacrifice’ schemes work is that you give up part of your salary and receive an equivalent benefit that is exempt from Income Tax and National Insurance.”
This is exactly how things will continue. You choose a bike up to the maximum value of £1,000 and make a salary sacrifice for a minimum period of 12 months: effectively, you hire the bike off your employer for those 12 months before ownership is transferred at the end of the year.
It’s not all doom and gloom
So what’s changed? In short, when the hire term comes to an end and the time comes to transfer ownership, the bike will come at a cost. Under the new HMRC Valuation Table, employees should pay a FMV for the bicycle in addition to the amount agreed over the minimum 12-month period, rather than the mere five per cent, as was typical up until a few weeks ago. This would mean that a bike originally costing £1,000 would be valued at £250 at the end of the first year. Add that on to the monthly instalments already paid back to the employer and the whole package doesn’t seem quite so appealing. But it’s not all doom and gloom, and there are ways around it.
The good news is, a quick glance at the new guidelines reveals the FMV reduces year-on-year, meaning if you’re likely to stay in your job for six years or more, and can agree an extended loan period, the cost at the end of it will be negligible.
Keep riding the bike
In fact, the final market value decreases year-on-year, and if you agreed with your employer that you would make a salary sacrifice for 12 months, you wouldn’t necessarily have to hand over the goods when that time was up. You could keep riding the bike, based on the fact that it still belonged to the employer, then transfer ownership later along the line, at which point the final payment value would have significantly decreased.
Another option is that your employer decides not to charge you the full FMV as suggested in the guidelines, but instead agrees a lower price. In this case you as the employee would need to pay tax on the difference, which will leave you less out of pocket than paying the FMV.
Even if you do end up transferring ownership after one year, thus making less of a saving, really you will have still benefited from an interest-free loan, plus made a tax saving, so we think it’s still a very worthwhile scheme to take up.
Individual schemes that operate under the government initiative, such as Evans Cycles’ Ride2Work, are positive about the changes and say “employers need no longer concern themselves with the protracted valuation process”, and by removing ambiguity [the scheme] will prove less of an “administrative burden”.
If you are buying a bike through the Cycle to Work scheme it must be used predominantly for travelling to and from work, therefore it must be suitable for that purpose. However, it’s worth noting: “The Inland Revenue does not expect you to keep a record of mileage.”
And with kit, it’s a similar story; for example, high-visibility clothing ticks the right boxes, whereas downhilling kit and an aero helmet do not, as you’re unlikely to need to time trial to the office. This is the party line from the official rule book, but as far as we know, no one’s actually looking over your shoulder to check everything you buy is hi-vis yellow!
It’s largely down to the discretion of the individual scheme and retailer, so if you’re in doubt over what you are and are not allowed, ask a retail assistant for some advice.
Real Rider: Hanna Holden, how the scheme worked for me
“The Ride to Work Scheme was a simple and straightforward process. I spent some time at the Evans store in Wandsworth, looking at bikes and test riding a few until I found one that suited me and my needs — a Specialized Sirrus Comp Hybrid. The scheme allowed up to £1,000 to spend on a bike and any accessories I might need for commuting to work. This meant I could include a decent lock for my bike. The staff were very helpful, patient and able to answer any questions about the scheme. The next step was to fill in the Ride to Work application form, provided by my employer. This included a simple calculation to work out how much discount I was entitled to. My voucher turned up a week later and I was able to pick up the bike I had chosen at Evans the following weekend.”
Am I eligible to use the scheme?
You must be paying PAYE, earn more than the National Minimum Wage after salary sacrifice, and have a contract that does not end during the hire period. Any company can sign up to the scheme, so you’ll just need to ask your employer if they are participating in the initiative. Under-18s can join the scheme as long as their guardian signs a guarantor agreement.
Why would my employer want to join the scheme — what’s in it for them?
In short, they will make some financial saving and benefit from a more active workforce. Employers save on Secondary Class National Insurance Contributions, as the amount they’re paying in wages is also lower. See www.hmrc.gov.uk/specialist/salary_sacrifice.pdf for a more detailed explanation.
What’s a salary sacrifice?
This refers to the employee agreeing to give up part of their salary for an agreed period. In the case of the Cycle to Work scheme you would make a salary sacrifice for a minimum period of 12 months in exchange for the loan of a bicycle and safety equipment. Cyclescheme explains: “As salary sacrifice is taken from the gross salary (before tax) rather than net pay it means the employee pays less income tax and National Insurance. Employers that can reclaim VAT usually pass this saving on to their employees, which increases savings further.”
When do I own the bike?
You’ll own the bike when you and the employer have made an agreement on FMV and make a transfer of ownership. After 12 months of salary sacrifice you will pay an agreed amount to the employer, at which point the bike becomes yours.
Can I pay off the balance in one go?
No. You’re essentially hiring the bike from your employer until the end of a typical period of 12 months, at which point you have the option of paying the balance and taking ownership of the bike. You can’t opt to pay off the balance early, as the minimum hire period is a year.
What happens if the bike is stolen?
This responsibility lies with you, and if it’s stolen, you as the employee would be liable for any outstanding monies without any tax exemptions — so for obvious reasons you should get the bike insured straight away. Safety equipment, including Home Office-approved ‘Sold Secure’ D-locks and cable locks, can be bought under the scheme.
I hear the law has just changed and the end of my hire period is coming up — what happens now?
HMRC states: “As long as any payment that the employee makes for the cycle is equal to or more than the market value, there will be no tax charge under the employment income rules. If the employee pays less than market value, the difference will be taxable as employment income.” Basically, you either pay the FMV to your employer, request a longer hire period without salary sacrifice, or agree a smaller amount and pay tax on the difference.
Does it have to be a certain type of commuter bike to come under the Cycle to Work scheme?
No. You have a great choice when it comes to the scheme and you can opt for a mountain, hybrid, town, road or folding bike — although, don’t set your sights on a £5,000 custom build, because all bikes must come under the maximum value of £1,000.
Can I buy a more expensive bike and pay the difference?
No. There used to be an option of a ‘top-up’ facility, where you could choose the bike of your dreams and pay the difference to the employer, however, this produced ‘dual ownership’ and over-complicated the process, so is no longer possible.
Is there anything else can I buy under the scheme?
Any safety equipment is included under the scheme, which includes helmets, lights, locks, and hi-vis clothing. Ask your participating bike shop what they would recommend.
Can I buy a new bike each year?
Yes. As long as you make an agreement with your employer and you’ve met your minimum 12-month salary sacrifice and fully transferred ownership of the previous bike, then you can purchase another one under the scheme. You are unable to purchase two bikes in one year.
What happens if I lose my job?
Under Cyclescheme guidance: “Once signed, the Hire Agreement is non-cancellable following a cooling-off period of seven working days following collection of the goods. This means that if an employee leaves or is made redundant from their employment during the hire period they are obliged to pay the remaining salary sacrifice amount in full from net pay ie without any tax exemptions.”
With new HMRC rules, is it still worth doing?
Yes. We think so. The new announcements aren’t as bad as they seem, and time will tell how the scheme will continue to work in practice. It looks as if there are viable ways to avoid paying out too much, and regardless of the process you follow, you will still be making a saving, whichever way you look at it.
What is Cyclescheme?
Cyclescheme is the UK’s number one provider of tax-free bikes for the Government’s Cycle to Work initiative. It won the The Sunday Times Fast Track 100 award in 2009 and is connected with a network of over 1,500 independent bike shops. We speak to Cyclescheme director Richard Grigsby about out how it all began.
Richard explains that the incentives have been clear for both employers and employees right from the start. Along with the obvious financial benefits, more cycling largely equates to more “fit, happy and productive staff”.
He continues: “The Government initiative was born in 1999, although nothing was really formulated until 2004. Things really got going for us on February 14, 2005. We currently have about 30 members of staff and we’re growing still. It all started with 1.5 of us!”
Cyclescheme sold the company in March 2010 to the Grass Roots Group and moved to the Green centre in Bath, offering them room to grow.
“There are plenty of people out there using it,” says Richard, “and take-ups seem to be increasing, for example, large companies, such as IBM, have seen an exponential growth of users since their first year on the scheme.”
We ask Richard if we were limited to a number of bikes. “You could have a new bike every year — people see the value in having a spare bike and are maybe going for a folding bike or a racing option.
“The average spend is a £500 bike plus safety accessories — 15 per cent are getting helmets and 15 per cent is typically going on safety equipment. We don’t want someone to get the absolute minimum, but to equip themselves to ride all year round, and we want people to choose something light and comfortable.
“More than 55 per cent of employees using the scheme are entirely new to cycle commuting and 25 per cent of vouchers go out to women,” concludes Richard. “People are buying all sorts of bikes, folding, £600-£800 road bikes, a lot of hybrids.”
This article was first published in the October issue of Cycling Active magazine