On your bike – the tax benefits of the Cycle to Work Scheme
Cycling to work is without doubt a healthy and cost-effective way to commute and, depending on where you live, can also be significantly quicker.
Employers have been quick to catch on with many offices now offering cycle storage facilities and even showers for keen cyclists to freshen up before they start work.
The UK Government in recognition of these benefits and to encourage more people to cycle to work has introduced two cost and tax-efficient ways for businesses, their directors and employees to use and buy bicycles and the kit needed.
Company-owned bikes
It is possible for a business to buy bikes, including e-bikes, and associated equipment, such as helmets and locks, and lend them to directors and employees to use without cost. If bikes are made freely available to all staff, HMRC will consider the purchase of a bike capital expenditure, meaning that it qualifies for the Annual Investment Allowance.
Importantly, the bike is considered ‘loaned’ to the employee – they don’t own it – and it must be used mainly for qualifying journeys which does include commuting to and from work.
For small owner-managed businesses, where there may be a sole director, this can prove a useful and valuable tax relief.
Cycle to Work Scheme
Called Cycle to Work, it is effectively a salary sacrifice scheme where the cost of a new bike, clothing and helmets is paid upfront by an employer and repaid by the employee via deductions from their monthly salary.
It is a tax-efficient way for employees to buy or upgrade to new bicycles as deductions are taken before income tax and national insurance. It also means employees can buy a new bike, often at a significant discount.
It is a simple scheme that has helped more than two million employees in 40,000 organisations purchase new bikes and equipment.
Employers will need to register with a Cycle to Work scheme provider. There are several scheme operators, but five of the largest providers – Cyclescheme, Cycle Solutions, Evans Cycles, Halfords and Vivup – have partnered together to create the Cycle to Work Alliance.
Once an employee has chosen the bike they wish to purchase, their employer will need to approve the application and issue a voucher or redemption code that is then used to purchase the bike and equipment.
Employees will then pay back their employers each month out of their salary and before taxes are paid. Repayments are typically scheduled for 12 months.
Repayments are deliberately kept low, meaning at the end of the 12-month window employees have several options:
- They can buy their bike at what HMRC calls a ‘fair market price’ – typically up to 25% of the value of the package, representing a significant discount on the original sale price.
- Extend the loan for a further three years, paying a small refundable deposit of typically 3% or 7%. No repayments are made during this three-year period and after those three years, the kit is handed back and the deposit returned.
- Or the bike and equipment can be handed back and the employee can walk away, or perhaps start again with a new bike and equipment.
There are, as you might expect, certain conditions that need to be met.
A cycle is defined as having two or three wheels and can include e-bikes. The bike does not have to be a ‘commuter’ bike but should be used 50% of the time for commuting. Equipment is not defined and extends to helmets, clothing, locks, child seats and replacement parts to keep the bike roadworthy.
The scheme was for many years capped at £1,000 but that was lifted just before the Covid pandemic. However, many employers will set their own limits, meaning that the high-end racing bike may still be out of reach.
For further information on the Cycle to Work scheme contact our expert below.
