Cycle scheme for dummies

There is this moment in your UK employed life when your employer announces that from now on you are eligible for something called Cycle Scheme. It is something that promises you (hefty) discount for a new bike. “How wonderful!” you think at this point and immediately start looking into it.

I’ve started now seriously thinking about owning a bike. Something foldable but relatively speedy and nice to use. City bikes are brilliant to some extent, but there are occasional moments of frustration when all docking stations in the City are full. This is when I remembered that our employer is indeed enrolled into Cycle Scheme some year back.

Took me a few moments to figure out the whole thing. It is not super simple as their site promises - there are a few catches that you should be aware of.

Catch #1: It is not a discount for a bike. It is basically a (legitimate) tax evasion scheme. It works in a way that 100% of full bike price is split in 12 and deducted each month from your salary for a year. Before taxes. This is where you save. Bigger your tax, more you save by reducing your incomes before taxes. This is not a bad thing - there aren’t many ways of legitimately reducing your income before taxes, and my financial adviser recommended grasping every single one of them.

Catch #2: Max price for a bike is £1000. You have to fit full bike with (optional) accessories into this sum. This means there is certain limit to how much you can cut from your taxes.

Catch #3: You don’t own bike for the next 4 years. For the first year it is your company that owns the bike and rent it back to you, while deducting full price of the bike from your salary every month. After the first year, assuming you want to keep the bike, you have to pay extra - 7% of the original price over £500, or 3% if less than #500 - to the Cycle Scheme company. This company is interesting on itself - they use tax exemption rule to promote Cycle Scheme, while helping other companies with the paper work. It looks like Cycle Scheme Ltd is for-profit company that uses UK bureaucracy as an excuse to promote their services.

Catch #4: If you are planning on changing your employer during first year, outstanding price of the bike will be deducted from your final pay. Same happens if you get fired. You will likely loose your bike too, since you don’t own it. At this point you just paid full price for something you still don’t own.

Catch #5: After first year and for the next 3 years it is Cycle Scheme Ltd that owns the bike and rents it back to you. After you deposit a refundable 3-7% extra of the original bike price. It is only refundable in a way that if you decide to give up your bike during this period, it will be refunded. If you still want to keep your bike, Cycle Scheme will transfer the ownership to you after that extended period of 3 years is over. This is when you realise why you had to pay that extra 7% of the price - this is how much your bike is worth now, after 4 years since you bought it.

Obviously, if you decide to leave the country during these 4 years, bike stays in UK.

So, who might benefit from this scheme? If you don’t plan to leave your employer during next year, and leaving UK during next 4 years, and you really really want brand new bike, and it cost under £1000, and you are paying lots of taxes - Cycle Scheme might be good choice. You’d save about £400 off the list price, and you get a zero interest credit for a year - in other words you don’t need to scrape full price of the bike out of your savings.

On the other hand, if you happen to have private health insurance - check for the benefits they offer. Most likely than not they can match Cycle Scheme savings in the form of cash back or plain discount.