The tax saving Cycle to Work scheme was introduced over 20 years ago but it is still pedalling! Maybe … just maybe it will get a new lease of life from our present Covid-19 inspired difficulties.
There is little doubt that the air quality in our towns and cities has improved markedly whilst the country has been in lock down. Could this along with the government’s recently announced new investment in cycling facilities be the impetus for us to leave the car at home and take more of our short journeys by less polluting means?
In this article we take a look at the generous tax benefits associated with the provision of bicycles that have long been available for both employers and employees. It is important to note that the scheme is available to all companies with PAYE employees and this includes single directors in limited companies as well as multinationals.
What’s It All About?
The Cycle to Work Scheme enables an employer to provide their employees with a new bicycle and associated safety equipment free of any tax or national insurance. VAT registered employers can recover the VAT on the purchase price and include the cost in the Annual Investment Allowance claim thereby reducing their corporation tax charge.
For Employees this is a tax free benefit.
How It Works
In practice the employer purchases the equipment and loans it to the employee for a given period of time. This loan aspect is of crucial importance as any transfer of ownership will end the tax advantages.
Many employers operate a salary sacrifice scheme alongside this so that the employee pays a tax efficient contribution to the cost (and perhaps all of the net cost) during the loan period but this is not essential.
The Small Print
There are of course a number of qualifying conditions including:
1. The scheme has to be available to all employees, but not necessarily on the same terms
2. The bicycle must be used at least 50% of the time for qualifying journeys
these are all or part of a journey between your home and workplace. For this reason the bicycle could be used to cycle to and from a railway station.
3. The ownership of the bicycle must remain with the employer throughout the loan period
4. There can be no automatic right of purchase or ownership at the end of the loan period
but the employer can at its discretion later transfer ownership using HMRC’s simplified valuation method.
5. There is an effective limit of £1,000 for the cost of the bicycle and safety equipment.
a cost in excess of this amount comes within the remit of financial services legislation and therefore acts as a bar to most employers.
The Tax Savings
The figures quoted below assume an initial equipment cost of £1,000 loaned for 2 years to an employee who is taxed at the basic rate and any lost interest is ignored from these calculations
Without Salary Sacrifice:
Cost to the employer – £698.46
Cost to the employee – £34.00
With a Salary Sacrifice of £25.50 per month
Cost to the employer – Nil
Cost to the employee – £450.16
A generous employer can provide a significant benefit to their employees at a little more than two thirds of the retail cost with the employee paying a token tax charge only if they take ownership at the end of the loan period.
In the more common situation where salary sacrifice applies employees can spread the cost of the bicycle over two years and save over half of the retail cost.
If you would like to discuss this tax0efficient scheme or indeed any other aspect of company or personal tax please get in touch.
If you are interested in the detail of the calculations here they are in all of their glory !
The Calculations :
The figures quoted above are based on the following worked example
A bicycle and safety equipment costing £1,000 provided to a basic rate taxpayer on a 2 year agreement and ignoring any interest cost over the loan period:
Spends £1,000 on the bicycle and safety equipment
Recovers VAT of £166.67. Thus a net cost of £833.33
Claims the Annual Investment Allowance on the net cost – saving £158.33 in Corporation Tax.
So the net cost has reduced to £675. (£(1000 – 166.67 – 158.33))
At the end of a two year loan period they can transfer ownership of the bicycle to the employee. The value of the bicycle is deemed to be £170 (17% of its purchase cost). A benefit in kind NI charge of £23.46 will arise.
The overall cost to the employer is therefore £698.46.
Without Salary Sacrifice: The income tax due on the transfer at the end of two years will be £34 – 20% of the deemed value of £170 as a benefit in kind.
With Salary Sacrifice: Assume this is set at £25.50 per month for 24 months* the employee would save income tax and national insurance of £8.16 per month. Thus the net cost to the employee is £17.34 per month
Overall the £1,000 bicycle and equipment will cost the employee
(24 x £17.34) + (20% x £170) = £450.16.
*This being a total of £612 that approximately equates to the net cost of the bicycle for the employer after the National Insurance saving from the salary sacrifice arrangement is taken account of