Please Explain Cycle To Work Scheme

Black

A Friend went for the cycle to work scheme and went for a £ 997.99p road bike
When he went to the re payment calculator, it told him he will pay £ 997.88p.

Thought you got money off the bike but 0.11p ?

Advice please and he earns £ 32,000 per year if this helps

rolf_f

You pay for the bike out of your wages before tax. Therefore, when you are paying for the bike, your gross income shrinks by the full cost of the bike so you aren't taxed on it.

d3anharper

http://www.cyclescheme.co.uk/calculator

Works a £997 bike out at £678,so I think it may be you calculator thats not working....!

smidsy

So (for ease of calculation) £1000 bike and cost deducted from salary over 10 months.

So £100/month deducted from your salary before tax which means your taxable pay is now less, therefore you get the 20% (as a lower end tax payer) on that £100. So for every £100 it only cost you £80.

£80 x 10 = £800 saving you £200.

Not 100% accurate figures (as you actually get relief on NI as well) - but you get the idea.

Black

Thats what he thought d3anharper
But he sent me the Cycle to work agreement.
And the calculator states 26 payments at £ 38.33p total £ 997.88p

Thanks smidsy
But why is this not shown on the calculated payments on the C2C web site

smidsy

Yes but you are not taking into account the tax relief. They deduct 38.33 but because that comes out of the wages before tax you are saving 20% of that figure times 26 payments. Ergo £199 saving (actually more with NI etc).

d3anharper

Yes Smidsy is correct, the agreement has to show the full value as in effect it is a loan for that amount.

ic.

Don't forget that at the end of the 'hire period' you have to either buy the bike from your employer or hand it back

The figure to buy it at used to be a 3 or 4% but my employer has advised the rules have now changed and it's likely to be 20% of the initial loan amount. Meaning any money you save on tax relief you'll end up loosing

Black

OK `making sense
Thank you ill let him know

IC yep but he as been advised to say He wants to keep the bike each time they start to ask
if you want to buy it and eventually they agree you want to buy it later when they offer you
to buy it for around £ 50 pounds.
Thats what the chap advised whom does the organising of C2C at my friends place of work.

d3anharper

http://www.guardian.co.uk/money/2010/no ... ax-benefit

The buy back after one year in the above example would be £250, there goes pretty much all the saving

Down with HMRC I say.....

zedzed

You don't buy it after year 1 though ... you "loan it" for another 3 years (for a small fee - like 4%) and then once the 3 year loan is up the bike is yours (or you can get the small fee back). Only issue there is that the bike isn't really yours until after 4 years .. so I guess you can't sell it on after 2 or 3 years (although how they'd ever know?!).

Dez

p.s. Makes more sense as a "deal" if you're into the 40% (or 50%) tax bracket. Yup ... the better off you are better the "tax break" is and therefore the cheaper you get the bike for!

BowtomePhil

If you are in 40% tax bracket you save 42% , big saving.

After one year you can rent for a further 7% for 3 years. If the bike gets lost or a write off in those 3 years, you owe nothing, at the end of 3 years you owe nothing, so effectively that 7% gives you the bike.

You could in theory sell it and say it was a write off.

My money gets deducted monthly from my wages before I have to pay wages on it.

d3anharper

Selling it and saying it was a write off is fraud, not recommended.

Yep it is a very bizarre regressive tax break, the more you earn the bigger the benefit....

mustgettaller

Regarding the end of the scheme, there's another option - just give the bike to the employee, and take the tax hit - surprisingly, it seems to be the cheapest option!

I first heard of this on a forum a year or so ago, from one of the chaps who was involved, I believe, in setting the scheme up.

Here's a good explanation from "DiscoverCyclingToWork"
http://www.discovercyclingtowork.com/indepth/end/end-of-the-hire

The employer simply gives the bike to the employee at the end of the scheme. They will need to report a taxable benefit in kind to HMRC of the value of the bike on the employee's P11d form using the HMRC table.

In the case of the 12 month old £1,000 bike this value would be £208.25 (25% of £1,000 less vat) the taxman will charge tax on the £208.25 which for a lower rate (20%) taxpayer, will be £ 41.65. Higher rate (40%) tax payers will pay £83.33. The BIK value is the value of the bike and not any safety equipment such as clothing etc.

Employees don't even have to find this sum because the P11d has the effect of adjusting their tax code up slightly for the following year. So the tax due will be recovered by HMRC over the course of the following year. This is about £3.47 per month for our lower rate example. The figures will vary slightly depending on the employer's VAT status and of course the original purchase price of the bike but this isn't so far from the original values.

It may be necessary to charge VAT on the BIK value if the scheme wasn't open to all employees. However if it was then it isn't normally required. If in doubt ask your local VAT office.

BowtomePhil

Why give a £700 bike back? For a rental of £49 for 3 years , it is mine effectively

paul64

My £1000 C2C from this time last year has just hit that 1 year mark and the options were to hand it back, buy it for £250 or extend the rental for 3 years for £70. For all the reasons in this thread I paid for the extension, when that expires I will be asked to pay the market value and I'm intrigued to see what that will be, hopefully £0 of course. The tax option sounded good but my employer is too big to entertain something like that.

BowtomePhil

After extending it, you do not pay anything at the end of 3 years. That is a fact.

d3anharper

Nope, HMRC rules state a bike purchased for over £500 has a 2% residual value after 5 years. The table in the Guardian link above has all the rates.

BowtomePhil

After one year, you rent for 3 more years at 7 % of the value, that includes everythign you bought, not just the bike.

If after the 3 years you want to give the bike back, you get the 7% back, if not it is yours with no further payment.

http://www.cyclescheme.co.uk/employers/ ... ire-period

rolf_f

d3anharper wrote:

Yep it is a very bizarre regressive tax break, the more you earn the bigger the benefit....

It's not bizarre. Tax breaks, by definition, are generally going to benefit people most who pay most tax. The only way to get round that is to make tax flat rate or to make the benefit flat rate - but then it won't be a tax break.

It might not be fair but tax breaks aren't about fairness - the only thing that is really regressive about it is that it isn't universally available to all workers.

BowtomePhil

It is available to all, it is up to your company to join the scheme.

rolf_f

BowtomePhil wrote:

It is available to all, it is up to your company to join the scheme.

Yes, I know that. That's why it isn't available to all.

d3anharper

Rolf F wrote:

d3anharper wrote:

Yep it is a very bizarre regressive tax break, the more you earn the bigger the benefit....

It's not bizarre. Tax breaks, by definition, are generally going to benefit people most who pay most tax. The only way to get round that is to make tax flat rate or to make the benefit flat rate - but then it won't be a tax break.

It might not be fair but tax breaks aren't about fairness - the only thing that is really regressive about it is that it isn't universally available to all workers.

I see where you are coming from, but in my opinion all this does is takes revenue from the exchequer, passing administrative burden to companies, and lining the pockets of the facilitating companies.

If the government want to promote cycling, and see the price of bikes as a stalling point, why not just excempt them from VAT. Far less admin, and the same benefit universally.

BowtomePhil

They used to be exempt from VAT on this scheme, the goverment reversed that January 2012.

rolf_f

BowtomePhil wrote:

They used to be exempt from VAT on this scheme, the goverment reversed that January 2012.

Well, partly exempt - didn't tend to apply to public sector; I always paid the VAT anyway.

d3anharper

BowtomePhil wrote:

They used to be exempt from VAT on this scheme, the goverment reversed that January 2012.

Yes the heady days when you could get full VAT exemption, and there was no residual value forced on you made this scheme fantastic. No more though