As 1 August 2024 was ‘Cycle to Work Day’, in this month’s back to basics we are looking at the Cycle to Work scheme. This scheme allows employers to support and encourage the use of bicycles by employees to commute to work.
How does it work?
Under the cycle to work scheme, a bike is hired to the employee for them to use mainly to cycle to work. The employee pays for the use of the bike under the hire agreement – with the hire cost equal to the cost of the bike divided by the duration of the hire agreement. So far, this doesn’t look particularly enticing, but there is a tax benefit for both the employee and the employer thanks to what is called salary sacrifice. This means that the employee could save up to 28% to 42% of the cost of the bike.
The saving comes about because instead of paying the hire costs out of net (post-tax) income, the employee gives up an amount of their gross salary, before tax, in exchange for use of the bike. The savings for the employee are equal to the tax and NIC which would normally be due on the amount of pay given up. The employer can also make some modest national insurance savings.
What exactly are the savings?
The amount of tax savings depends on the value of the bike hire and the tax rate paid by the employee.
If the hire price is set at £1,000 over two years, so the employee sacrifices £500 of salary each year, this could save them £140 in tax and NIC as a basic rate taxpayer each year, and up to £210 per year as a higher rate taxpayer.
The employer can also make a saving on the amount of salary sacrificed, as they do not need to pay employer’s NIC. For the example above, this would be a saving of 13.8% x £500 = £69 each year
Conditions
There are three main conditions that must be met for the scheme to qualify for the tax benefits set out above:
- Firstly, the employee must use the bicycle and any associated safety equipment mainly for qualifying journeys. Mainly means ‘more than 50%’ and ‘qualifying journeys’ is all or part of a home to work trip. (The employee isn’t required to cycle all the way to work, cycling to/from a station would also qualify.) HMRC don’t expect individuals to keep detailed records of their bike use, but will look for obvious examples where the condition is not being met.
- Entry to the scheme must be open to all employees of the employer. It’s not possible to run the scheme for specific individuals or groups.
- During the hire period, the bike must remain the property of the employer (or scheme provider) and the employee should not have an expectation of owning the bike. If the bike is transferred to them at the end of the hire period, this should be a separate transaction, discussed below.
Setting up the scheme
To set up a cycle to work scheme, there needs to be an agreement between the provider of the bike and the employee. If the employer doesn’t wish to operate the scheme themselves, then they can pay for a third party provider to hire the bike to the employees and handle the administration of the scheme.
What is covered?
The scheme covers push/pedal bikes as well as electrically assisted bikes.
The scheme can also allow the hire of ‘associated safety equipment’ which would generally include helmets, lights, bells, safety clothing and child safety seats. This does not include non-safety related items such as training equipment or cycle computers.
Expensive bikes
In terms of the tax benefits, there is no limit on the value of the equipment that can be provided. However, there are a couple of practical points that need to be considered due to the constraints of the minimum wage legislation and consumer credit licencing.
Firstly, the amount of salary sacrifice cannot reduce an individual’s wage to less than the applicable national minimum/living wage rate.
Secondly, the agreement between the employee and the employer is likely to be a consumer hire agreement, regulated by the Consumer Credit Act 1974. This means that if the employer is hiring a bike and associated equipment worth more than £1,000, they will need to register with the Financial Conduct Authority – or make sure they are using a scheme provider who is appropriately registered.
Looking after the bike
While the employer/scheme provider will own the bike, care and maintenance usually falls to the employee. Government guidance recommends that employees insure the bike under their home insurance, disclosing who owns it.
The end of the scheme
When the hire period comes to an end, there are three main options:
- The hire is extended.
- The hire comes to an end and the employee returns the bike.
- The employee acquires the bike as a separate transaction.
If the employee wants to keep the bike – the most popular option - then there may be tax consequences unless the transfer is handled correctly.
As a general rule, the employee should pay the market value for the bike at the time of transfer (out of their net pay) to avoid an income tax charge. As valuing individual bikes can be tricky, HMRC operates a simplified scheme which determines the value based on the age of the cycle and whether it cost more or less than £500. A bike costing over £500 which is two years old would be valued at 17% of its original cost.
| Age of cycle | Acceptable disposal value percentage | |
|---|---|---|
| Original price of the cycle less than £500 | Original price £500+ | |
| 1 year | 18% | 25% |
| 18 months | 16% | 21% |
| 2 years | 13% | 17% |
| 3 years | 8% | 12% |
| 4 years | 3% | 7% |
| 5 years | Negligible | 2% |
| 6 years and over | Negligible | Negligible |
This approach can be used for most bikes, although specialised bikes – for example a custom made bike or collectable bike would need to be valued individually.
Summary
Although there will be some administrative costs to operating the scheme, the Cycle to Work scheme is a popular benefit for employees as it can help them acquire a new bike at a reduced cost. It is estimated that around two million employees have benefited to date.
From the employer’s perspective, it is a useful incentive – and could help to keep their workforce healthier and happier.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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