Real Life Cycle2Work Calculation.

sc999cs

Hi,

I bough a cycle last August on the Cycle2Work scheme using a £950 letter of collection. This resulted in monthly repayments of £75.19.

I've just handed in my notice and expected to pay a lump sum of £498.86 from my final salary after tax and NI have been deducted (assuming my last month's salary does not contain a deduction for C2W). The company I work for have just sent out a letter detailing how they are dealing with the HMRC clarification of the 'disposal value'.

For a payment of 5% of the LOC value they will extend the lease for a further four years so that the value of the cycle is far less at the end of the lease agreement. If however you want to return the cycle they will charge a 5% disposal fee (not sure where they get that from).

As I'm leaving during the scheme I must pay back the value as given by the HMRC (25%) which means that although I have saved £130.83 in tax and NI, I have to pay £237.50 disposal fee. (Immediately, although I thought it was at the end of the scheme and I'd be invoiced). Total cost of the cycle to me £1187.50. Apparently this works out at an APR of 55% approximately. Even if I'd completed the scheme. the APR would be 34% - still not good value.

in summary, the cycle2work scheme has turned into an expensive loan and really isn't worth the effort.

sc999cs

A question for those in the know - Can the company charge a 'disposal fee' if you decide not to keep the bike?

As the loan agreement was for 12 months can they demand immediate repayment for the disposal value?

From the help pages at http://www.cycle2work.info/employeedetail#a8

If you leave before the end of the hire period, you must pay your employer the balance of the amount still to pay and this will deducted from your final net pay. You may then have continued use of the equipment without further payment until the hire period expires, when you may be offered the opportunity to purchase the equipment for its then fair market value. However this transfer of ownership is the subject of a separate agreement and is not governed or influenced by the Hire Agreement you sign for this scheme.

So I should only pay the outstanding £498.86 at the moment?

Any experts in the house???

My 'credit agreement'

On termination of this Hire Agreement upon your ceasing employment with XXXXXXXXXX you will have to pay a termination fee of an amount not exceeding the outstanding Hire Payments and calculated as set out at "Leaving Employment" in the Employee Terms & Conditions overleaf. ...

Leaving Employment The Cycle2work agreement is a 12 months agreement. However if you leave employment you will no longer be able to benefit from the tax exemption under the Cycle2work Agreement. Therefore if your employment with XXXXXXXXXX ceases for any reason during the 12 months term you will be required to pay a termination fee to XXXXXXXXX. The termination fee will not exceed a value equal to the outstanding monthly salary reductions.

owenlars

This is the relevant bit of our agreement all agreed in writing with HMRC

At the end of the 12 month period the company may, at its discretion, allow you to purchase the bicycle and safety
equipment at a fair market price by way of a deduction from your net pay. The fair market price of the bicycle and
safety equipment will be calculated as 5% of the initial cost (including VAT). If for whatever reason you choose
not to do this, you can return the bike and safety equipment to the company, however, you will be charged 5% of the initial
bike cost (including VAT) toward the administrative costs of the company handling the bike.

If you leave the company before the end of the 12-month period, the outstanding cost (remaining amounts to have been
collected via salary sacrifice and residual value at the end of the 12 month period) will be deducted from your net
pay or by cheque within 7 days of leaving, if insufficient net pay is remaining.

jeremyrundle

I looked at the c2w scheme, does it not say lease, therefore you are hiring the bike in effect, surely it is best to buy one in the first place.

Twostage

The rules changed recently for NEW agreements which brought in a 25% valuation at the end of the first year for cycles over £500 purchase price. Existing agreements set the value as 5% after one year. You should have some paperwork that specified this ? I think you should be paying :-

Number of months left * 75 quid plus 5% from your gross salary.

I admit there is an argument about the 5% as it's not actually a year old yet.

pdw

The rules didn't change. HMRC issued guidance for pricing second hand bikes, as many schemes were selling at prices that obviously weren't fair market value (£50 for a one year old £1k bike?).

I'm not sure if the company can charge a disposal fee if you choose not to buy the bike given that there can be no automatic provision for the company to offer to sell the bike to you in the first place.

in summary, the cycle2work scheme has turned into an expensive loan and really isn't worth the effort.

That depends entirely on how the scheme is set up. Our company scheme offers savings of between 44% and 51% depending on your tax bracket, based on sale after 3 years. Even if sold after 1 year, you'd see between 39% and 44%.

jeremyrundle

Blimy,.......... buy a bike to start with it's easier.

Twostage

pdw wrote:

The rules didn't change. HMRC issued guidance for pricing second hand bikes, as many schemes were selling at prices that obviously weren't fair market value (£50 for a one year old £1k bike?).

Ok, the rules were clarified. Our scheme was 5% after a year and had a big take up.

Even if sold after 1 year, you'd see between 39% and 44%.

I'd like to see the maths for that. Our scheme has collapsed because it no longer stacks up. Particularly for lower tax bracket earners.

sc999cs

The clarification was made just after I signed up and unfortunately has wiped out any advantage of the Cycle 2 Work scheme. The only way of obtaining an advantage is for your company to extend the lease period for a total of four or five years. As I'm leaving I'm hit twice as I can't extend my hire period, AND I no longer gain tax relief on the remaining amount (even though I'll still be commuting on it).

The most annoying thing is that the cost of leasing the bike is equal to it's retail value including VAT (minus any tax relief). For a basic rate tax payer I estimate the savings to be £200 tax, and £90 NI (on a £1000 LoC) and with the clarification stating that the value is 25%+VAT the cost at the end of the year is now £290 totally wiping out any saving. You end up paying VAT twice, once on the original collection and then on disposal.

I don't see any reason for the Cycle 2 Work scheme to continue and I expect that a lot of retailers dependent upon the scheme and going to see their sales drop.

pdw

Ok, the rules were clarified. Our scheme was 5% after a year and had a big take up.

Really what happened is that HMRC provided some (very reasonable, IMO) lower limits above which they won't question the value. If you really believe that your 1 year old £1k bike is worth less than £250, then you can use a lower figure, but you may need to provide evidence to back that up.

It's unfortunate that many schemes were set up where the benefits relied on being able to sell the bike at a value that clearly wasn't a fair market value, and further that many employers wouldn't then sell at less than the FMV and treat it as a taxable benefit.

I'd like to see the maths for that. Our scheme has collapsed because it no longer stacks up. Particularly for lower tax bracket earners.

OK, £1k bike, basic rate tax.

Ex VAT price £833. Employer wants to recover that over 12 months. Any salary that you sacrifice, they don't have to pay employer's NI on either - currently 12.8%, will be 13.8% after April, so if we were doing it now we'd use a weighted average of 13.6%. This means employer needs you to sacrifice £733 to break even, which is £499.90 out of your take-home (again, using a weighted average for employee NI which also changes in April).

If we were to sell after 12 months, minimum FMV (inc VAT) is £250. Suppose instead it were sold to the employee for £35.52 (inc VAT). This would give rise to a taxable benefit of £214.48, so you'd owe tax of £68. Your employer also owes some employer NI on the benefit - £29.60 - which is covered exactly by the £35.52 less VAT.

Net result for employee: paid £499.90 + £68 + £35.52 = £603, a saving of 39.7%.
Net result for employer: recover exactly what they paid for the bike.

Savings are obviously better if you delay the sale for a few years.

The key to getting decent savings is (a) not paying the FMV, and instead just taking the tax hit and (b) having the employer pass on the employer NI savings that they make on the salary sacrifice arrangement.

with the clarification stating that the value is 25%+VAT the cost at the end of the year is now £290

No, the HMRC guidance says:

"It is acceptable to use the VAT exclusive amount in calculating the original price of the cycle. However, where the valuation percentage is applied to a VAT exclusive amount, VAT will need to be added to the result in order to arrive at the acceptable market value."

So it should be £250, not £250+VAT.

I don't see any reason for the Cycle 2 Work scheme to continue and I expect that a lot of retailers dependent upon the scheme and going to see their sales drop.

On the contrary, VAT has gone up, employee NI is going up, and employer NI is going up, all of which improve the savings.

sc999cs

Twostage wrote:

pdw wrote:

The rules didn't change. HMRC issued guidance for pricing second hand bikes, as many schemes were selling at prices that obviously weren't fair market value (£50 for a one year old £1k bike?).

Ok, the rules were clarified. Our scheme was 5% after a year and had a big take up.

Even if sold after 1 year, you'd see between 39% and 44%.

I'd like to see the maths for that. Our scheme has collapsed because it no longer stacks up. Particularly for lower tax bracket earners.

As my wife was watching TV and I was bored I've done the calculation

Assuming lower rate tax payer (20% tax, 9% NI), and no VAT paid on FMV.
Age of bike 1 year <£500 = 15% saving; £500+ = 6% saving
Age of bike 2 years < £500 = 18% saving, £500+ =11% saving
Age of bike 3 years < £500 = 21% saving, £500+ = 17% saving
Age of bike 4 years < £500 = 26% saving, £500+ = 23% saving
Age of bike 5 years < £500 = 29% saving, £500+ = 27% saving.

However my soon to be former employers are charging a 5% + VAT of LoC value to either extend the agreement or return the bike. This has a massive impact on the savings.

Age of bike 1 year <£500 = 7% saving; £500+ = 3% more expensive
Age of bike 2 years < £500 = 14% saving, £500+ = 8% saving
Age of bike 3 years < £500 = 15% saving, £500+ = 11% saving
Age of bike 4 years < £500 = 20% saving, £500+ = 17% saving
Age of bike 5 years < £500 = 23% saving, £500+ = 21% saving.

If VAT does have to be paid on the FMV then the savings are further reduced and for £500+ bikes completely wiped out for a one year old bike.

pdw

Employee NI is 11%, rising to 12% in April, not 9%.

The government rules don't require employers to cover the costs on the hire payments. Assuming your employer is VAT registered then if they're requiring you to cover the inc VAT price of the bike through salary sacrifice, and then charging you 25% at the end, then they're making a very tidy margin on the whole scheme.

benpinnick

sc999cs wrote:

Hi,

I bough a cycle last August on the Cycle2Work scheme using a £950 letter of collection. This resulted in monthly repayments of £75.19.

I've just handed in my notice and expected to pay a lump sum of £498.86 from my final salary after tax and NI have been deducted (assuming my last month's salary does not contain a deduction for C2W). The company I work for have just sent out a letter detailing how they are dealing with the HMRC clarification of the 'disposal value'.

For a payment of 5% of the LOC value they will extend the lease for a further four years so that the value of the cycle is far less at the end of the lease agreement. If however you want to return the cycle they will charge a 5% disposal fee (not sure where they get that from).

As I'm leaving during the scheme I must pay back the value as given by the HMRC (25%) which means that although I have saved £130.83 in tax and NI, I have to pay £237.50 disposal fee. (Immediately, although I thought it was at the end of the scheme and I'd be invoiced). Total cost of the cycle to me £1187.50. Apparently this works out at an APR of 55% approximately. Even if I'd completed the scheme. the APR would be 34% - still not good value.

in summary, the cycle2work scheme has turned into an expensive loan and really isn't worth the effort.

sc999s,
How did this £75.19 get calculated? £950 should have generated (assuming 100% payback over 12 months) £68 a month or so before tax. Assuming youd paid 7 months of that with 20% discount for tax thats only £375 + your 1 off fee. Not that cheap, but less than the value of your bike..... Where do you get your numbers?

shouldbeinbed

Bike =950

12 x 75 = 900 plus x% FMV at end

Either you've misread yr payslip and are looking at the pre-deduction figure or your tax & NI payments are unusually high/low (can't get my head round which way it'd be) or your employer has made a bit of a hash of calculating the repayment figure in the first place.

Your net payment with tax & NI saving for 950 bike should be 50 - 60 a month

Don't go in all guns blazing because if yr 1st post figures are correct, there's a mistake or wrong assumption somewhere to correct before the horse trading starts.

Shotsaway

Those figures just don't make any sense.

Ignoring the fact you are leaving, you should have been paying the following

a) Assuming your current employer is VAT registered and you are a basic rate tax payer
Cost of goods = £950
Less VAT @ 17.5% = £141.49
Amount your employer needs from you = £808.51
Gross monthly salary sacrifice (£808.51 / 12) = £67.38
Net monthly salary sacrifice (£67.38 less Tax and NI) = £46.49
True cost to you (£46.49 x 12) = £557.87 plus £237.50 FMV and any disposal or admin fees (if any)

b) Assuming your current employer is NOT VAT registered and you are a basic rate tax payer
Cost of goods = £950
Amount your employer needs from you = £950
Gross monthly salary sacrifice (£950 / 12) = £79.17
Net monthly salary sacrifice (£79.17 less Tax and NI) = £54.63
True cost to you (£54.63 x 12) = £655.50 plus £237.50 FMV and any disposal or admin fees (if any).

Mr Plum

What a clusterfu*k of information.

Not totally on topic, but what should also be considered is that the bike is bought for full RRP. If you spend a Sunday evening looking online you should be able to find something that is exactly (or very close to) what you're looking for with a 25% - 30% saving on the RRP straight off with no C2W faff. Put it on a 0% credit card and your laughing...

pdw

Not totally on topic, but what should also be considered is that the bike is bought for full RRP.

Again, that depends on the scheme. My C2W bike came from online retailers at well below RRP, and I expect to see more than 50% saving on that price by putting it through our company scheme.

If your company uses Halfords, Cyclescheme or one of the other commercial operators then yes, the scheme operator takes a cut and that will limit your ability to get a good discount.

If your company runs their own scheme then you're probably free to buy from where you want and to negotiate a discount or use the cheap online retailers.

The reason there are so many different figures on this thread is because there are lots of different ways to set up a scheme that take advantage of the tax break.

Pat Murray

Shotsaway wrote:

Those figures just don't make any sense.

Ignoring the fact you are leaving, you should have been paying the following

a) Assuming your current employer is VAT registered and you are a basic rate tax payer
Cost of goods = £950
Less VAT @ 17.5% = £141.49
Amount your employer needs from you = £808.51
Gross monthly salary sacrifice (£808.51 / 12) = £67.38
Net monthly salary sacrifice (£67.38 less Tax and NI) = £46.49
True cost to you (£46.49 x 12) = £557.87 plus £237.50 FMV and any disposal or admin fees (if any)

b) Assuming your current employer is NOT VAT registered and you are a basic rate tax payer
Cost of goods = £950
Amount your employer needs from you = £950
Gross monthly salary sacrifice (£950 / 12) = £79.17
Net monthly salary sacrifice (£79.17 less Tax and NI) = £54.63
True cost to you (£54.63 x 12) = £655.50 plus £237.50 FMV and any disposal or admin fees (if any).

At last someone who actually understands the calculations, it never fails to amaze me how many people criticise the scheme yet seem to have no understanding of the figures. The only thing I would add is that he does not need to pay the FMV – he can just accept that as a taxable benefit and pay the tax on that element £47.50. So the actual total cost even with the HMRC new guidelines should be £605.37 – quite a saving.