When you get a bike* through Cyclescheme, your employer is initially the owner. You hire the bike from them. It’s yours in the sense that you use it, you look after it, and you insure it. But, a bit like a mortgaged house, you don’t own it outright.
Your employer pays for the bike then you reimburse them, normally over 12 months, via deductions from your gross salary. During this salary sacrifice period, you’re hiring the bike from your employer. Like hire purchase? Not exactly, no. There’s a key difference. The package doesn’t become yours after the final instalment. You have to make an additional payment to take ownership. Without this, the process would be classed as hire purchase and, crucially, the bike would incur tax.
Once the salary sacrifice period is over, you’re all square with your employer. However, you don’t yet own the bike. You’re got three options: return it to Cyclescheme; own it now; or own it later.
In this case, you don’t take ownership of the bike at all. You send it back – not to the shop where you got it but to Cyclescheme. Expect to pay around £25 to courier a bike within the UK – for example, with Paisley Freight. For cyclists who like to swap their bikes regularly, returning one like this isn’t a bad deal. You get a brand new bike for a year and you’ll save 32% (standard rate taxpayers) or 42% (higher rate taxpayers) on the price. But there are more tempting options…
Own it now
You pay Cyclescheme the market value of the bike and immediately take ownership of it. It’s yours to do with as you wish. The market value is set by HMRC. For a bike that’s a year old, it’s 18% of the original price if it cost less than £500, and 25% of the original price if it cost £500 or more.
So for a bike that was £1,000, the ownership fee would be £250. Even factoring that in, you’d still be purchasing the bike at a discount because the salary sacrifice payments will have added up to substantially less than £1,000, due to savings in tax and national insurance. In this example, standard rate taxpayers will have paid £680 in salary sacrifice payments (due to their 32% savings), while higher rate taxpayers will have paid £580 (due to 42% savings). So in total, including the ownership fee, that’s £930 or £830. Either is a handsome discount from £1,000, especially when you consider that you’re effectively paying for the bike in instalments. But you can do a lot better.
A bike’s market value declines the older it gets. That’s worth noting if your salary sacrifice period is longer than a year. For example, if the hire period (i.e. salary sacrifice period) is 18 months, the market value for the bike is set by HMRC at 16% (under £500) or 21% (£500-plus) rather than 18% and 25% for year-old bikes.
The decline in market value is also the key to making the biggest savings of all…
Own it later
If you want to keep the bike but pay as little as possible for it, this is the option for you. You enter into what’s called an extended use agreement with Cyclescheme and hire the bike for a further 36 months (less if the salary sacrifice period was longer) at zero monthly cost.
The ownership fee plummets. After four years, HMRC says that a bike’s market value is just 3% (under £500) or 7% (£500-plus), so the savings are much, much greater than after one year. That £1,000 example bike would cost a total of £750 (standard rate taxpayer) or £650 (higher rate taxpayer), as the ownership fee would be only £70.
Because you’re ultimately taking ownership of a four-year-old bike, you might think you’d pay the ownership fee at the end. It actually works a bit differently. You pay Cyclescheme either 3% or 7% as a deposit when you take out the extended use agreement – which is tosay, right after the salary sacrifice period.
When the extended use agreement ends, usually after 36 months, you’ve got one final choice. You can return the bike to Cyclescheme, who will refund your deposit. Or, more likely, you can keep the bike and Cyclescheme will keep your deposit. You’re now the owner. (Effectively, you paid the ownership fee on a four-year-old bike up front in the form of your deposit.)
An extended use agreement doesn’t prevent you from getting another Cyclescheme package. Let’s say you get a bike in year one. For the next 12 months, you make salary sacrifice payments on that, then you take out an extended use agreement to maximise your savings on it. In year two, you can get another Cyclescheme package – equipment, perhaps, or maybe another bike – making salary sacrifice payments on that and subsequently taking out an extended use agreement for that package too.
You could keep doing that year on year. The limit is not the number of Cyclescheme packages but the amount of salary sacrifice you’re making at a given time. Ordinarily, the cap is £1,000 in salary sacrifice over 12 months. Depending on your salary and your employer’s consumer credit arrangements, your limit could be lower or higher than this.
* In this article, ‘bike’ generally means ‘bike and/or equipment’ – in other words, your Cyclescheme package. We’ve used ‘bike’ for brevity.
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