Is the Cycle to Work Scheme Right for You?
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The Cycle to Work scheme is a UK government initiative that helps employees save money on their cycling costs. It’s an attractive option for both employees and employers.
This guide will help you understand the Cycle to Work scheme in detail, including its eligibility requirements, financial savings, and how to get started.
What is the cycle-to-work scheme?
The Cycle to Work scheme is a government-backed initiative managed by employers or a third party. It allows employees to hire bicycles and associated safety equipment.
How does it work?
Cycle to Work is an employee benefit that works as a “salary sacrifice.”
What is a salary sacrifice?
Salary sacrifice is a process where employees agree to give up a portion of their pre-tax salary in exchange for a benefit from their employer, in this case, the hire of a cycle or safety equipment.
Normal process
Income – tax – the bike cost = take-home pay.
Salary sacrifice process
Income earned – the bike cost = total taxable income – tax = take-home pay.
*Most salary sacrifice agreements last at least a year.
Cycle to work scheme rules
Tax benefits under a salary sacrifice arrangement only apply if the following Cycle to Work scheme condition is satisfied:
The cycle is utilised mainly for work-related commuting and is owned by the company or a third party.
If the above condition is not met, the bike will be considered a Benefit in Kind, and the employer must tell HMRC about the taxable Benefit.
Scheme budget
The government has dropped the £1,000 cap on Cycle to Work spending, allowing you to spend as much as you like within your employer’s and scheme provider’s limit.
Items covered under the scheme
Bikes and some accessories covered under the scheme are but not limited to:
| Safety accessories | Essential accessories | Components and parts |
|---|---|---|
| *Helmets | *Clothing | *Pumps |
| *Lights | *Child safety seats | *Repair kits, |
| *Reflectors | *Cycle tool kits, | |
| *Tyre sealant, |
Who owns the bike?
You are simply renting the bicycle from your company or the plan provider until the agreed term expires.
After the term; you can:
- Return the bike
- Extend the rental agreement
- Repurchase the bike and equipment at a reduced price.
Eligibility
To be eligible, each of the following conditions must be met:
| Employer | Employee |
|---|---|
| *You pay your employees with Pay-As-You-Earn (PAYE). | *You must be paid using Pay As You Earn (PAYE). |
| *You can sign a legal contract on behalf of the business. | *Be 16+ and employed. |
| *You may buy your staff’ bikes and reclaim the expenses from their gross salary. | *After the salary sacrifice, your gross income should exceed the National Living Wage or National Minimum Wage. |
* If a salary sacrifice arrangement reduces take-home pay below the National Living Wage or National Minimum Wage, you can:
- Look at a reduced value package and/or a more extended hiring period.
- Hire a cycle without making a salary sacrifice.
There must be no option in the initial hiring agreement for the buyer to buy the cycle and equipment at the end of the hiring agreement. Employers must provide a written agreement to their employees stipulating the terms and conditions of the scheme.
Also Read: Small Business Owner – Buying a Company Car
Self-employed: buying a bike
The scheme is not open to sole traders as Pay-As-You-Earn does not apply to sole traders for tax and national insurance purposes (PAYE).
If you are a director of your own limited business, you could be eligible to participate if:
- You run a limited company or own one, and part of your pay comes to you through PAYE.
- The amount you get through PAYE is sufficient to pay for the cycle-to-work scheme and cover the national minimum wage.
Employee vs employer savings
The cycle-to-work scheme has several savings for both the employer and the employee, such as :
Employer savings
- For each employee who joins the scheme, you can save up to 13.8% of its value in National Insurance contributions.
- There are no fees associated with implementing or maintaining the scheme.
Employee savings
- Save 25–39% on a new bike and accessories while extending all costs.
- You don’t have to pay anything upfront; your employer will deduct the payments from your income before taxes.
- Lower taxable income
Employer vs Employee example
An employee who earns £25,000 per year joins the scheme.
The employee hires a bicycle for a period of 12 months at the cost of £1500 and agrees to give up £1,500 of their pre-tax salary in exchange for the hire of the bicycle.
Before the salary sacrifice, the employee would have paid £2486 in income tax and £1491.60 in National Insurance Contributions (NICs) based on their annual salary of £25000.
After the salary sacrifice, the employee’s annual salary is reduced to £23500, and they will now pay £2186 in income tax and £1311.60 in NICs.
This results in a saving of £300 in income tax and £180 in NICs for the employee.
For the employer, there is also a savings of £247 in employer NICs.
What happens if an employee quits?
After 14 days, the Hire Agreement is non-cancellable. If an employee leaves or is laid off within the hiring term, they must pay the remaining salary sacrifice amount from net pay without tax exemptions.
Sign up for the scheme
There are three steps for both joining the scheme.
| Step one: The business signs up for the scheme | Step two: Employee application | Step three: Start saving |
|---|---|---|
| Once signed up, they can use free promotional tools to help spread the word about their exciting new employee benefit. | The employee chooses a bike at a local store or online and applies through the scheme. Their company authorizes and pays for the equipment. | The worker is given their bicycle and may now begin making monthly payments. |
| You will need the following: *Employer code *Payroll number |
Conclusion
When considering whether the cycle-to-work scheme suits you, it is worth evaluating its pros and cons.
The main benefit of participating in the cycle-to-work scheme is that you can save substantially. The scheme allows you to hire a bike using your pre-tax salary, and employers can also receive additional tax benefits. Additionally, the scheme covers a wide range of items related to cycling, such as helmets and locks.
However, you must remember some important cycle to work scheme rules and eligibility criteria. Bike purchases are not subject to a budget, and the bike will legally remain your employer’s property until you have made all the payments. Similarly, you will not be eligible to participate in the scheme if you are self-employed buying a bike
In conclusion, while there are some restrictions and limitations to consider regarding the scheme, it is worth researching and evaluating whether it is suitable for you. Bike ownership can be expensive, and the cycle-to-work scheme can be beneficial in helping to reduce the cost of buying a bike. This scheme can be a great way to save money on bike purchases and become more active.
Fusion Accountants has extensive experience in advising on the tax implications of such programs, and we can help your company every step of the way. Get in touch today to find out how we can help you!
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