The Cycle to Work Scheme Explained

Cycle to Work: the advantages for the employee

The Cycle to Work scheme provides a way to try out cycling for a while at minimum financial cost, find out whether you like it, and if you do, you can then choose whether to buy the company bike you've been riding, or buy yourself a different one.

The scheme allows you to borrow or hire, from your company, a bike (and related equipment such as lights, saddlebags, reflective clothing) up to a value of £1000, from a supplier approved by your employer.

How does it work?

• You get your employer to agree to the scheme - the administration costs are now very low, and the benefits are high (see below), so it will be in their interest to participate.
• You choose a bike (and, if you want, the extras too: a high-visibility reflective jacket, protective gloves, panniers, cycle clips), which your employer then buys.
• You use the bike mainly for commuting or travelling on business, as well as for your own personal use.
• Your employer may charge you a hire fee: you pay this through salary sacrifice, so you don't pay income tax or National Insurance on that money.

At the end of the period of hire or borrowing, you and your employer may arrange for you to buy the bike at a fair market price. NB this option to purchase should not be set out as part of the original hire agreement (as that would create a hire-purchase agreement, which is not covered by the umbrella consumer-credit licence). No tax relief is available for the purchase: it must be paid from your net salary, and VAT is payable on the purchase price.

Information for employers

Easy setup

To set up the most straightforward version of the Cycle to Work scheme, an employer can simply buy a cycle and cyclists' safety equipment, reclaim the VAT, and loan it to an employee for commuting and business journeys. No declarations are necessary of provision of benefits in kind. Accounting for the cycles is done in the same way as another other fixed asset.

Hiring the equipment to employees

The decision on whether or not to charge employees a fee for use of the cycle, and the level of any fee, is left to the employer. The employee can pay by salary sacrifice, which will reduce payments of Income Tax, and (both employer and employee) NICs.

The Cycle to Work scheme just got a lot simpler for employers, with the introduction of a group credit licence, which allows packages to be offered to each employee up to a value of £1,000 (inc. VAT), without an employer having to arrange for any credit licence of their own.

Lord Berkeley (Secretary to the All-Party Parliamentary Cycling Group) said:

"An administrative burden has been lifted from employers who want to actively encourage cycling to work. We look forward to the simplified Cycle to Work scheme being actively promoted to all employers, including local authorities and NHS trusts facing problems caused by car parking limitations and increased rush hour traffic congestion. Workplace travel plans frequently reveal that many employees drive just a few miles to work and rarely car-share. Most of them could easily cycle five miles in less than 30 minutes, saving money while improving their health and fitness."

Selling the cycle on

The cycle can be sold on to the employee at the end of the loan / hire period. This should be done at a fair market price to avoid it being subject to income tax. You might wish to consult your local second-hand bike shop, or an onlne auction site such as Ebay, to establish the fair market price: keep a note of record how you arrive at the value, with the rest of your tax records. If you are VAT registered, the sale price must include VAT.

Frequently Asked Questions

Is there a minimum rental period ?

No, there is no minimum rental period. The DfT site states:

There is no fixed time period for which cycles and cyclists' safety equipment must be loaned under a Cycle to Work scheme. Similarly, there is no fixed time period for which a salary sacrifice scheme must run where one is used to offset the cost of loaning the cycle and cyclists' safety equipment.

What's the deal with VAT?

If the employer is VAT-registered, any subsequent sale of the bike to the employee will attract VAT. The flip-side of this is that VAT is reclaimable from the initial purchase of the bike.

In some places, the price that the bike is sold on to employees is given at values way below what would appear to be fair market value. How does that work?

Many people see a conflict between what the tax rules say, and the way in which some implementations of the scheme are carried out. As far as can be established, there has, as yet, been no challenge by HMRC to any of these nominal resale values. Nevertheless, with the rules as they stand, such a challenge is possible. If HMRC were to decide that a transaction had occurred below market value, then a tax charge could arise. For that reason, we recommend that you document the process by which you establish the fair resale value.

What about the mileage allowance?

If you use your own cycle for business journeys, you may be paid a tax-free mileage allowance of up to 20p/mile (this does not apply to your journeys between home and work). If the allowance paid by the employer is no more than that 20p/mile, it does not need to be declared on the P11D, and is not liable for Class 1A National Insurance Contributions. If you do not receive this full amount from your employer, you are entitled to tax relief for the difference between the amount you receive (if any) and that 20p/mile. This Mileage Allowance Relief can be set against any employment income. (Source: HM Revenue and Customs: here and here).

What else can an employer do to encourage cycling?

Secure parking

A secure place to store cycles is one of the most significant encouragements an employer can make. Non-cyclists will not fully appreciate its value, but studies show that this is one of the key issues for cyclists..

Pool bikes

The employer manages a pool of bikes. These bikes are available to any employee. The availability of pool bikes offers the business extra resilience should other transport networks fail. If any employee wishes to use one of these bikes for personal use too, they may do, without incurring a tax charge. The employer may choose to charge a hire-fee for the cycle: this fee can be paid via salary sacrifice.

Encouraging staff to use their own bikes

The employer does not run a cycle-to-work scheme, but does promote cycling amongst its staff using other means, because of the indirect benefits to the business, listed above. Employers can pay a tax-free mileage allowance of 20p/mile for non-commuting business trips made on the employee's own bike. If the employer does not pay this allowance, the employee can still claim the tax back from HMRC on an equivalent sum.

Extra holiday

Some employers have chosen to implement an additional reward system for employees cycling to work, consisting of a small amount of extra leave - 5 minutes - granted for each day's cycling. Over a full working year this equates to 19 hours, or two and a half extra days of leave, based on a 5-day week, 228 working days in the year, and a contracted working day of up to 7.5 hours). This programme is distinct from the Cycle-to-Work scheme, and can be run in addition to, or independently of, such a scheme, or as part of a broad workplace travel plan.

Other measures

The employer could offer storage lockers, showers, and cycle training.

Can I leave the scheme, once I've joined?

Section 9.2 of the DfT guidance states:

An employee has a unilateral right to terminate the hire agreement after 18 months under s.101 of the CCA. Notice of termination may be given to the employer before that point but the minimum period of notice must be either 3 months or 1 interval of payment, whichever is the shorter. These agreements may only be terminated before 18 months if the hire contract provides for this. Employees leaving the scheme early will be liable for any outstanding payments.

Legal footnote

Note that these notes on the Cycle-to-Work scheme are provided for guidance only, and reflect the tax position at the time of writing, and the law as it relates to the provision of consumer credit. If salary sacrifice is used to pay for the hire of the cycle, your pension and earnings-related benefits may be adversely affected, and the scheme must be a regulated hire agreement between employer and employee.

Read more on the Cycle to Work scheme here, including links to the relevant guidance from the Department for Transport and the Department for Health.