The Cycle to Work Scheme, also known as the Bike to Work scheme, is a Government tax exemption initiative designed to promote a healthier lifestyle to commuters by allowing employees to ‘borrow’ a bicycle and equipment from their employer as a tax-free benefit.
The employer benefits from the scheme as well as the employee, with tax benefits available for utilising the scheme, alongside the obvious benefit of encouraging employees to stick with their employer for a longer period and reducing the likelihood of sick days due to the healthier lifestyle!
This article primarily concerns the Cycle to Work schemes that operate using the salary sacrifice process. One alternative option is to provide a loan to an employee to purchase a cycle – this is similar to offering an advance of salary. Loan schemes, including those on an interest-free basis, may be subject to regulation by the Financial Conduct Authority (FCA).
Who can take part in the Cycle to Work Scheme?
Employers of any size are eligible to run a Cycle to Work scheme. The tax and National Insurance benefits are only available however, to staff who are treated as employees for tax purposes. This covers directors of limited companies (even if you’re the sole employee) provided a portion of your income is via PAYE scheme and is enough to meet the national minimum wage after the salary sacrifice scheme deductions.
What are the requirements of the scheme?
The tax benefits of a salary sacrifice arrangement will only apply where the Cycle to Work scheme requirements are met, those mainly being
- The cycle is owned by the employers and/or a third party, and
- The cycle is mostly used for commuting or business travel.
If a scheme is structured whereby at least one of these conditions is not met, then the cycle will be considered to be a Benefit in Kind, and employers will be responsible for reporting this to HMRC.
What is the salary sacrifice process?
Salary sacrifice is where your employee agrees to give up part of their pre-tax salary in exchange for a benefit from their employer, which in this case is the hire of a cycle for active travel and/or safety equipment.
There will be a separate hire agreement, which may or may not be regulated by the FCA. This will typically either be between the employee and employer directly, who pays for the hire through the salary sacrifice arrangement. In other cases, where an employer uses a third-party scheme provider, who hires the cycle to the employee and is paid by the salary sacrifice proceeds via the employer.
What are the benefits to the employee using a salary sacrifice arrangement?
Alongside the benefit of having access to a cycle, and not having to make a full payment up front to outright purchase the cycle, providing the scheme meets the relevant criteria, the employee can benefit from a tax exemption.
Normally when you buy a bike, you would pay the full price including tax. When you use the Cycle to Work scheme however, you actually pay less income tax and national insurance, as the payments you make are deducted from your salary before tax is applied. These payments therefore lower your salary before the income tax and national insurance contributions are calculated.
What are the benefits to the employer of setting up the Cycle to Work Scheme?
As the benefits offered to the employees through the salary sacrifice scheme are exempt from tax, the employer does not need to pay the national insurance contributions on the salary deducted before tax is applied. This is at a rate of 13.8% of the salary foregone.
If you purchase cycles outright to hire to your employees, this will be categorized as capital expenditure and therefore eligible to be claimed as capital allowances. For the majority of businesses, the expenditure will qualify for the Annual Investment Allowance currently up to £200,000 each year against the businesses taxable profits.
What happens at the end of the scheme?
Whilst you’re maintaining your salary sacrifice contributions, you are hiring your bike out. When the hire period ends, you can either choose to:
- return the bike at no extra cost
- extend the agreement
- or buy the bike to assume ownership.
If you’re interested in owning the bike in the future, it might be worth comparing the savings you’d make over the course of the scheme, with the cost of buying the bike at the end.