A negative interest “Loan” to get a new bike? Yes Please!
I often get asked at work about the “Cycle to Work” Scheme, typically with statements such as “Is it really worth it?”, “I’ve heard you don’t save much” and “I hear you don’t get to own the bike”.
All of these questions have come about due to the perceived complexity of the scheme.
However, in simple terms it really isn’t that complex at all, provided that you make the right choice at the end of the first year. Be honest – If I offered you a “Negative interest loan” over 1 year, and just stipulated you have to keep the bike for 4 years then what’s not to like?
The Cycle to Work scheme essentially allows you to pay for a bike in monthly installments prior to your tax & N.I deductions, meaning your payments are tax free. You do need to commit to using it for commuting, but that’s all part of the fun, and no evidence is required. However, the chancellor does not want you to immediately own and be able to sell that cycle on at the end of the payment period, as this would effectively make it a tax free hire purchase. This is where the complexity lies. The payments over the first year that cover 100% of the cycle cost are classed as a “Hire charge”, and the bike does not belong to you at the end. There are 3 options at the end of that first year:
1. Buy the bike for the “Current market value” (18 or 25% of original purchase price)
2. Return the bike and walk away from the arrangement
3. Pay a 3% (If bike value <£500) or 7% (If bike value >£500) “Deposit”, “Hire” the bike for NO CHARGE for 3 years and then you get to keep the bike if you forfeit the deposit
This all sounds terribly complex, but options 1 & 2 are where the “Is it really worth it?” questions come from. Simply put, if you select either of these then it really isn’t a particularly good deal. On my last bike, option 1 would have saved me about £70 overall.
Option 3 is where the scheme really comes in. Let me summarise an example of a £1000 bike for someone earning £20K P.A:
£83.33 / Month paid for 12 months before tax and NI are applied (Gross). Real impact (Net) to employee is £56.67 per month.
Net result = £680 effectively paid for the first 12 months on a £1000 bike
7% Deposit paid at the end of 12 months = £70
So – Total cost of ownership = £750, paid over 12 months, provided you keep the bike for 4 years, after which ownership transfers to you.
If you are a higher rate tax payer, then the total cost reduces to £650
It really is a great saving, and if your employer doesn’t participate then encourage them to do so, as it’s open to all employers and is a great healthy worker initiative.
Here are some stores that participate in the scheme :