The Cycle to Work scheme

The Cycle To Work Scheme is a tax incentive aimed at encouraging employees to cycle to work consequently reducing air pollution and improving their health. The scheme allows employees to benefit from a long-term loan of a bicycle and commuting equipment such as lights, locks and panniers, completely tax-free!

To take advantage of the scheme your limited company will need to provide a voucher to you, as the director, for the purchase of a bicycle through the scheme. You can purchase a bicycle at a greater value, but you must make up the difference personally.

The voucher amount is deducted by way of a salary sacrifice through your fees or salary. A weekly/monthly sum is deducted from your gross wage before tax and NI are calculated on the difference. The legislation states; ‘You need to be earning more than the National Minimum Wage after your loan repayment has been deducted’. With this in mind, the scheme will only be of financial benefit to you if you are not taking low fees or salary from the company.

The general benefits from the scheme are reduced tax and NI costs and you can also claim the VAT back on the purchase. If your PAYE and NI liabilities are already small this is unlikely to be of use for you.

There is an Approved Mileage Allowance Payment for using your own bicycle for business journeys and surprisingly enough you could claim 20p for every business mile travelled, as long as you qualify under the temporary workplace rules. This may be worth considering as an alternative to the scheme.

Entitlement to use the Cycle to Work Scheme

The scheme is open to all full, part-time and contract staff whose term of employment is more than the period of the loan, usually 12 months. Self-employed workers cannot take part in the scheme.

To take advantage of the tax breaks that result from salary sacrifice you need to:

  • be a UK taxpayer via the PAYE system;
  • be over 18 years of age to comply with Consumer Credit Act legislation;
  • be earning more than the National Minimum Wage after your loan repayment has been deducted.
  • have exceeded the employer's probationary period (if applicable).

Salary sacrifice arrangement - how are savings made

A salary sacrifice occurs where you give up your right to receive part of your pay in return for the employer's agreement to provide some form of non-cash benefit, in this case the loan of a cycle and related equipment. A summary of the advice from the HM Revenue & Customs is available from their website.

You pay back the loan on your goods from gross rather than net pay for the hire period. This is how you to benefit from Income Tax and NI relief.

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