Effect of Cycle to Work Scheme on Lost Personal Allowance (£100-125k)

AdamC_2

Hi all,

Trying to get my head around Salary Sacrifice Schemes, and in particular, the Cycle to Work Scheme. Can anyone advise if, say, a person is on a pre-tax income (after pension contributions) of £125k, would 'buying' a £5000 bike work like this...

Bike Cost = £5000, which, because it comes out of pre-tax income, effectively saves 40% tax (i.e £2000) and 2% NI (i.e. £100), making the cost of the bike £2900

So far, so good... but next is the part I'm not sure about...

Because the pre-tax income is now classed as £120k, £2500 of Personal Allowance is 'recovered', which was subject to 40% tax (i.e. £1000)

So the effective cost of the £5000 bike is now £1900

Is that right? It seems almost too good to be true, or am I not understanding something?

And do the same rules apply to an electric vehicle SS lease, albeit with a small BIK charge?

Thanks

ispookie666

I don't think your gross income decreases for salary sacrifice, your taxable salary is the one which decrease.  

Jeremy535897

The effective tax rate between £100,000 and £125,140 is 60%, plus 2% NIC, so anything that reduces your salary only costs you 38% of it. However, my understanding of the cycling salary sacrifice scheme is that the amount sacrificed is the hire charge over the term of the hire, not the cost up front. See:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/845725/cycle-to-work-guidance.pdf

AdamC_2

ispookie666 said:

I don't think your gross income decreases for salary sacrifice, your taxable salary is the one which decrease.  

Thanks. I think it was my typo - I've amended "gross" to "pre-tax".

AdamC_2

Jeremy535897 said:

The effective tax rate between £100,000 and £125,140 is 60%, plus 2% NIC, so anything that reduces your salary only costs you 38% of it. However, my understanding of the cycling salary sacrifice scheme is that the amount sacrificed is the hire charge over the term of the hire, not the cost up front. See:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/845725/cycle-to-work-guidance.pdf

Thank you for the link. I thought the amount sacrificed is the full price of the bike. Halfords (the Cycle to Work scheme administrator in my case) will issue a 'voucher / letter' for the full price, and that appears to be what's recovered over 12 months. There's no "we'll recover £2000 from your pay-packet and you can pay us £3000 at the end if you want to keep it" as far as I can see (unlike car scheme's where you're only covering the hirers cost of the car over 3 years). Having said that, Annex C in your link does suggest there's a final one-off fee, but talking to a few people, my impression is they never actually contact you.

It's the recovery of Personal Allowance that no-one seems too clear about, but if Cycle to Work is included in your "anything that reduces your salary...", then it's quite attractive and I'm thinking my calculation might be correct.

Jeremy535897

The terms of the charged for hire might be quite short, but unless you start early in the tax year it is likely to be spread over at least two tax years. My understanding is that you continue to hire the bike for another few years at no charge, and then HMRC accept that there is no need for a final payment, but I have no practical experience of these schemes.

The one thing that is most clearly not in doubt is that you get 62% tax/NIC relief on whatever salary is sacrificed for a qualifying cycle scheme, if you are in the £100,000 to £125,140 income band throughout the period you have sacrificed salary.

AdamC_2

Jeremy535897 said:

The terms of the charged for hire might be quite short, but unless you start early in the tax year it is likely to be spread over at least two tax years. My understanding is that you continue to hire the bike for another few years at no charge, and then HMRC accept that there is no need for a final payment...

Ah, I see. I thought maybe I'd have to lay low and avoid riding past Halfords...

I have a couple of days to get my request in, so I'm guessing it starts in April

Jeremy535897 said:

The one thing that is most clearly not in doubt is that you get 62% tax/NIC relief on whatever salary is sacrificed for a qualifying cycle scheme, if you are in the £100,000 to £125,140 income band throughout the period you have sacrificed salary.

Great news, thanks

macy08

The value of your certificate/voucher will reduce your gross pay over 12 months from when payroll start deductions. This is turn reduces your taxable (and NICable) pay by the same amount for the same period.  At the end of the initial 12 month 'hire' period you should be given the option to [1] return the bike with no further cost to yourself, [2] extend the hire period for another 36 months at a small refundable fee based on the market value after the 36 months or [3] buy the bike at the then market value at 12 months. HMRC have a table to determine the market value at various points in time https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21667a, if they allow you to pay less than market value this would create a taxable benefit which should be avoided.

AdamC_2

macy08 said:..., [2] extend the hire period for another 36 months at a small refundable fee based on the market value after the 36 months or...

Interesting. I wonder if an extended hire stops me from also taking part in the scheme next year for kit, upgrades, spares etc?

norsefox

AdamC_2 said:

macy08 said:..., [2] extend the hire period for another 36 months at a small refundable fee based on the market value after the 36 months or...

Interesting. I wonder if an extended hire stops me from also taking part in the scheme next year for kit, upgrades, spares etc?

You can have more the one bike on the Cycle Scheme concurrently.

It would need to be justifiable for your commute, but that's a broad and liberally applied/ignored element.

https://www.cyclescheme.co.uk/the-rules-of-cycle-to-work#:~:text=However, it is worth noting,to get both at once.

ispookie666

The cycles schemes I have been part of have taken the deductions over 12 months.  At the end of 12 months, I got an email from cycle scheme to decide what I wanted to do (ownership fees) 
https://help.cyclescheme.co.uk/article/42-what-is-an-ownership-fee.  

This is how I have done this through Cyle2Work 
Obtained quote for bike, safety gear 
Contacted payroll/cycle2work administrator 
Paperwork signed 
voucher issued 
voucher redeemed 
Bike delivered .... Yay
I can see gross pay deducted every month on the payslip for the cycle2work (12 monthly payments make up to the total voucher amount).  

Also, I have not noticed any change in personal allowance in the tax return completed by our accountant for my wife due to cycle2work