How are cycle to work savings made?

Cycle to work operates as a 'salary sacrifice' employee benefit. This means that you agree to give up part of your salary in exchange for a benefit – in this instance the benefit is a bike and/or accessories. The salary sacrifice is taken from your gross salary (before tax) which means that you will pay less Income Tax and National insurance.

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How does salary sacrifice create a saving?

The saving is achieved by paying for the bike and/or accessories directly from your gross salary (before tax). This means your income tax and national insurance are based on your salary less the cost of the bike and/or accessories. This means that your income tax and national insurance are calculated on the reduced amount of salary. Hence, the amount of tax and national insurance you pay is less.

Normally, when you get a bike the process looks like this:

  1. You earn your money
  2. You pay your tax
  3. You choose your bike and buy it

When you get a bike via salary sacrifice the process looks like this:

  1. You earn your money
  2. You choose your bike and pay for it
  3. You pay your tax

The graphic below visualises this:

As you can see, by going down the salary sacrifice route you will lower the amount of income that you can be taxed on and thus make a significant saving on the cost of your new bike and/or accessories.

An up-to-date overview of rates of tax can be seen on the Government's website. However, to save you opening another tab we can confirm that normal rates of tax are 28% for a lower rate taxpayer and 42% for a higher rate taxpayer. This means that most scheme participants save between 28-42% on the cost of their bike and/or accessories during their initial hire period. 

It's important to remember that the cost of the commuting package will always show up on your payslip as the gross (or RRP amount) rather than the net (or 'with-savings') amount. 

An example of this is shown below:

It's also important to remember that an Ownership Fee will be due at the end of the Hire Period. This is to avoid tax liability and to ensure ownership of the bike is smoothly and effectively transferred from Cyclescheme to you. 

Cyclescheme always recommends that employees choose our 'Own it later' option, as this ensures savings are protected and enables you to get another bike or accessories package if you wish. As the 'Own it later' option will cost either 3 or 7% of your packages original value your total savings will end up being between 21 and 39% depending on the cost of your bike and/or accessories and the rate of tax you pay. 

Helping hand 

Savings can be affected by various factors, you can read a note about this within the How much will I save on the cycle to work scheme? answer. 

To learn more about Ownership Fees head over to our answer What is an ownership fee?.

For a personalised savings figure that includes ownership fees, visit our calculator and enter your details. 

You can search to see if your workplace is signed up using the search box on Cyclescheme's homepage.

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