Cycle to Work Scheme Tax Guide for Employees

The Cycle to Work scheme operates as an employee benefit known as a ‘salary sacrifice’ or salary exchange.

Essentially, this means that you agree to sacrifice a portion of your salary in exchange for a benefit, which, in this case, is a bike and/or bike accessories.

A workplace cycle scheme is ran by an employer but not all employers offer the salary sacrifice scheme to their employees.

By taking advantage of the cycle to work scheme, the sacrificed income becomes tax free because it’s deducted from your gross salary before tax.

Your income tax and national insurance contributions are then calculated based on your salary minus the cost of the bike and/or accessories.

This results in a lower amount of tax and class 1 national insurance being taken from your salary which should increase your take home pay.

By taking advantage of cycle to work, you can enjoy the benefits of a more affordable commute while reducing your tax and national insurance bill at the same time.

It can be a win-win situation that empowers you to make the most of your financial circumstances and get fit at the same time.

Since 2017 The Department for Transport has confirmed: “The scheme has involved over 40,000 employers across the country, and has contributed to help more than 1.6 million commuters to cycle to work.”

How does the cycle to work scheme operate?

Your company must be enrolled with one of the numerous cycle scheme providers and they arrange a hire agreement with them to cover the cost of the bike and any other items.

• You select the gear you require, including the bicycle, attire and extras, then submit your request to your employer.

Under the cycle to work scheme there is no cap on the value of the bicycle and safety gear provided to an employee so in theory you can choose the most expensive electric bike or cheapest pedal bike depending on your own needs.

• After your employer approves your application with a service provider, they cover the bike and kit cost, and you receive a notification which you present to the retailer instead of paying with your own money.
• The agreed cost of your bike is then reimbursed to your employer automatically through monthly deductions from your salary.

The amount you pay each month is determined by the total value of the loan with a cycle to work salary sacrifice scheme generally spanning a minimum of twelve months, regardless of the duration of the associated hire agreement.

How do I qualify for a workplace bike scheme?

To qualify for the workplace bike scheme you must be at least sixteen years old, be paid through the HMRC PAYE payroll system and earn more than the minimum wage after the salary sacrifice has been deducted.

The following criteria must also be satisfied:

• At no point during the hire period can an employee own the bicycle;
• A minimum of 50% of the bicycle’s usage must be for ‘qualifying journeys’, specifically commuting to work;
• The opportunity to use hired bicycles must be extended to the entire workforce without excluding any employee groups. This does not necessarily mean that every arrangement has to involve a salary sacrifice.

How much tax do I save using the cycle to work scheme?

Signing up for the cycle to work scheme means that you aren’t liable for income tax or national insurance on the bike payments.

This is the source of your savings the bike and/or accessories are purchased using your gross salary (before tax).

If you are a basic rate taxpayer the rate of tax you will pay is set at 20% for income tax and 12% in national insurance, resulting in a 32% saving on the part of your salary that you have sacrificed.

For higher rate taxpayers the income tax savings increase to 40% instead of 20% with a 2% national insurance deduction.

As an example for a £2,000 bike a basic rate taxpayer should save around £640 taking the effective cost of the bike to £1360.

In this example the monthly cost would be £113.33 with the cycle to work scheme and at least £166.67 if you bought it yourself giving you a saving of £53.33 per month.

Can I own a bike at the end of a cycle to work scheme?

At the conclusion of the hire period, an employee may have three choices:

• Choice 1: purchase the bicycle and equipment under a separate agreement made at that time.

You can normally purchase the bike after the cycle to work scheme ends but you must pay its current market value. This price depends on the duration you’ve used the bike and/or accessories and their original purchase price.

• Choice 2: prolong the hire agreement.

After your cycle to work scheme ends you may have the option to extend the bike rental which can help you maximise your savings and the ownership is usually transferred to you automatically and the end of extended period.

• Choice 3: return the bicycle and related equipment.

Employees are not permitted to allocate their own money towards the expenses of goods hired under a cycle to work scheme consumer hire agreement.

Does my employer have to run a salary sacrifice cycle to work scheme?

It isn’t compulsory for employers to make available the cycle to work scheme. Many large employers run the scheme (for example the NHS bike to work scheme) and they will make you aware of how to use it.

Should I insure a cycle to work scheme bike?

While the bicycle remains the employer’s (or third-party provider’s) property during the period of the scheme it is expected that it is maintained and properly cared for.

HMRC advises that employees take out separate insurance or verify and update their home contents insurance the bikes ownership.

Bike mileage allowance and salary exchange

Taxpayers who use their own bike to travel to temporary workplaces (not normal commuting) for work purposes are entitled to claim back .20p per mile free from tax and national insurance from their employer to help cover costs.

Employees are not eligible for the 20p per mile tax free mileage allowance for business travel if they use a bicycle provided by their employer.

If you are thinking about participating in a cycle to work scheme and use your bike for work purposes you must decide whether you would prefer to use your own bicycle and claim up to 20p per mile for business travel, or opt for a bicycle loaned through the cycle to work scheme.

Cycle to work scheme considerations

Using any salary sacrifice scheme needs to be thought through and the cycle to work scheme is no exception.

While salary sacrifice can provide financial advantages like an increase in your net pay, it is important to be aware of potential downsides.

A lower salary, as reflected on payslips and bank statements, may affect an individual’s ability to secure loans or credit agreements, as lenders typically assess affordability based on reported income from employers.

Additionally, various workplace and statutory benefits, such as maternity pay and universal credit, are linked to an individual’s salary. Reducing earnings through salary sacrifice could unintentionally result in a decrease in certain benefits.

It is vital to thoroughly research the implications of salary sacrifice based on your own circumstances.