New rules for tax saving cycle scheme HMRC cut 'salary sacrifice' savings
16 August 2010
Employees who buy a bike under the Cycle to work scheme may have to pay more following new guidelines from HMRC. Until recently, they could purchase the bike for a nominal 5% of its list price. This could now rise to 25%, considerably reducing potential savings.
Employees can save money on the cost of buying a bicycle to ride to work by joining their company's salary sacrifice scheme. This is a tax-saving initiative, where the firm pays you less each month but compensates you for lower pay by providing a bike for your use. The scheme is funded by the saving in tax and national insurance made by individual employees and by the firm. This aspect of the Cycle to work scheme remains unchanged. Employers can also offer other 'perks' in a similar way, including child care vouchers and additional pension contributions. Cycle provision has been encouraged in this way since 1999. An estimated 400,000 people at 25,000 companies have taken part in the scheme.
New tax guidance
Although employees normally end up owning their bikes, the scheme is not technically hire purchase. Cycles remain the property of the employer and are merely loaned for the purpose of riding to work. After a certain period, the bike may be offered for sale to an employee. Until now, this has often been after a year, at a nominal 5% of the list price. This reflects a degree of depreciation, but HMRC has taken the view that a bike is worth considerably more than this after a year's use. It has issued a matrix, showing the percentage of the original price it expects bikes to be offered for from now on. For cycles costing more than £500 this is 25% after 1 year, 17% after 2 years and 12% after 3 years. For cheaper bikes, costing less than £500, the corresponding percentages are 18%, 13% and 8%. After 6 years, bikes of any value are deemed to be of negligible value.
For a typical employee, earning £30,000, who decides to buy a bike that costs £850, the potential saving after 3 years falls from £379 to £293 compared with the old rules. Employees still benefit by gaining access to the new bike from day one but will see their long-term saving fall unless they defer purchase for a longer period. After five years, the percentage charge suggested by HMRC falls to 2% for an expensive bike, although depreciation will have genuinely reduced its value over this period anyway.
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