Cycle to work tax-free
Did you know that cycle to work option might save you some money by cutting taxes?
Exemption for employer-provided cycles
Employees can use their employer-provided cycles and safety equipment without paying tax on the associated benefit as long as the following conditions are met:
- There is no transfer of property in the cycle or equipment, and it remains the property of the employer.
- The employer uses the cycle and equipment mainly for qualifying journeys between home/work and other business journeys.
- The cycles and equipment are available to all employees who want to make use of them. Each employee doesn’t need to have their own dedicated bike and the employer can operate a pool system.
A Cycle-to-Work scheme combines a salary sacrifice arrangement with a hire agreement. There are several commercial providers offering these schemes.
Under the scheme, the employee enters into a salary sacrifice scheme and gives up part of his/her salary in return for the provision of a cycle. The employee enters into a hire agreement, under which they hire the cycle from either the employer or a third party. The hire is paid for by the sacrificed salary.
As long as the above conditions are met, the provision of the cycle is exempt from tax. It is important to emphasize that ownership of the cycle must not pass to the employee. As employer-provided cycles are protected from the operation of the alternative valuation rules, the exemption is not lost by using a salary sacrifice scheme.
This arrangement allows their employees to save tax on the salary given up, and both the employer and employee to save Class 1 National Insurance.
Cycle-to-work schemes typically run for three years and at the end of the period, the employee has three options:
- Extend the hire agreement
- Return the cycle and equipment
- Buy the cycle and equipment
There are no tax consequences if the employee chooses option 1 or option 2. If the employee decides to buy the bike, as long the amount paid is at least equal to the market value of the bike at the time of the transfer, there is no tax to pay. However, if the amount paid is lower than the current market value, the shortfall is a taxable benefit.
HMRC recognise that it can be difficult to establish the market value of a second-hand bike. Therefore, the simplified approach can be used under which no tax charge will arise as long as the employee pays at least the percentage of the original value for the age and original cost of the bike as shown in the table below.
For example, if an employee pays at least £24 for a cycle costing £300 (8% of £300) at the end of a 3-year hire period there will be no tax to pay on the transfer.