In 2022, the Sport in England Report estimated that 7.61 million people participated in cycling for sport, leisure, or travel in England alone, with participation more than double compared to figures from 2002.

The Cycle to Work Scheme has helped support this upward trend, providing significant tax savings to employees and employers for the hire of bikes and qualifying bike equipment used for commuting. Over 1.6 million individuals have used the scheme to promote ‘healthier journeys to work and reduce environmental pollution’.

This article provides a detailed exploration of the Cycle to Work scheme, including the tax benefits, accounting treatment, and the process for employers and employees.

 

What is the Cycle to Work Scheme

The Cycle to Work Scheme (CWS) was implemented in 1999 as part of the government’s Cycling and Walking Investment Strategy and has been adopted by over 40,000 employers across the UK. The CWS is focused on an employee benefits scheme that reduces salary and VAT taxes for employees who hire bikes and related cycling equipment for their commute to work. In addition, the CWS offers significant tax savings for employers, including reduced National Insurance contributions, VAT reclaim and Annual Investment Allowances (AIA).

The scheme is designed to financially incentivise cycling to work, reducing the cost of travel for employees, promoting health, and indirectly increasing employee productivity for businesses. The CWS is also aimed at reducing congestion and carbon emissions in city centres and physical inactivity costs for the NHS, estimated at £1 Billion per year, with a further indirect calculation of £8.2 billion.

 

Eligibility Of Participation

The Cycle to Work Scheme can be utilised by any employer across the public, private and voluntary sectors, irrespective of the business size. Employers can choose to set up their own salary sacrifice scheme or use an eligible Cycle to Work Scheme provider to run a Scheme on their behalf. This is often the preferred method due to the requirement for financial compliance with the CWS legislation.

To be eligible for the scheme, individuals must be classed as business employees and be paid through the Pay As You Earn (PAYE) System. The scheme is only available to individuals over the age of 16 who earn at least the minimum wage after any salary sacrifice has been taken from their pay.

As the Cycle to Work Scheme specifically promotes cycling commutes, the government legislation specifies that at least 50% of the bike’s use must be made up of qualifying commuting journeys. It is uncertain how rigorously HMRC will monitor or enforce the specific use and type of bike hired, as there seems to be no clear measurement method in place.

The Cycle to Work Scheme is not eligible for self-employed individuals; however, allowable travel expense claims can be made through an annual self-assessment tax return. For further guidance about the eligibility and tax efficiency of using bikes for business purposes, please get in touch with our team.

 

How Does the Cycle to Work Scheme Work?

Initial Purchase

In theory, the Cycle to Work Scheme requires the employer to purchase the bike and associated equipment on behalf of the employee, who then pays a monthly hiring fee to the employer through a salary sacrifice scheme.

The purchase of a bike and equipment is carried out by a CWS qualifying partner, with the employer acting as the overseeing partner. While a CWS rental agreement is between the employer and employee, the CWS partner will oversee the financing, FCA requirements and rental contacts.

 

Salary Sacrifice

A salary sacrifice is when an employee agrees to give up part of their pre-tax salary in exchange for a benefit from their employer, in this case, the Cycle to Work Scheme. Employees rent a bike and equipment through their employer (CWS partnering company), with payments being made monthly by the employee through their PAYE. These payments are withdrawn on the employee’s gross pay rather than their take-home pay. The employees’ monthly taxable pay is subsequently reduced, resulting in reduced income tax and national insurance contributions.

 

Duration of Rental Agreement

The duration of a CWS rental agreement is dependent upon the associated Scheme provider but usually ranges from 12 to 18 months. If the hire agreement lasts more than 18 months, the employee has a statutory right to terminate the contract under the Consumer Credit Act 1974.

The depreciation value of bikes and associated equipment is based on an acceptable disposal value as a percentage of the original price and includes VAT. For bikes and equipment over £500, this is set at:

  • 1 Year = 25%
  • 18 Months = 21%
  • 2 Years = 17%
  • 3 Years = 12%
  • 4 Years = 7%
  • 5 Years = 2%
  • 6 Years and Over = Negotiable

 

Depreciation over Useful Life

When employers participate in the CWS, they typically spread the cost of the bike over its projected useful life. This aligns with the duration of the rental agreement with the employee. Typically, after the initial 12-month rental period, an Extended Use Agreement can be put in place. This agreement adjusts the bike’s value based on its depreciation over the initial year. As a result of this depreciation, the employee may have the option to make smaller monthly payments if they choose to keep the bike under an Extended Use Agreement beyond the initial rental term.

 

Termination

If an employee leaves the company or chooses to terminate their agreement, they are still eligible to make payments towards their Cycle to Work Scheme Agreement. Employees can return their bike to their ex-employer or seek to purchase the bike and equipment, covering the remaining balance and any associated deprecation expense.

Depending upon the terms of the agreement and CWS provider, it may be possible for an employee to transfer their agreement to their new place of work.

 

Is there a limit on the scheme?

When the Cycle to Work Scheme was initially rolled out by the government in 1999, a limit of £1,000 was set on the purchase of a bike or equipment. This limit was set as most providers were not regulated by the Financial Conduct Authority (FCA).

Since most providers are now regulated by the FCA, the previous £1,000 cap on the value of bikes and equipment has been lifted, meaning employers can set their own limits. While some employers may place no limit on the total purchase or hiring price, some choose to set limits of £2,000 to £5,000 to reduce total administration costs to the business.

 

What is included in the Cycle to Work Scheme?

The Cycle to Work Scheme allows individuals to hire any bike that has a minimum of 2 wheels and a maximum of 4 wheels.

The CWS legislation does not explicitly define the list of eligible ‘safety equipment’ but states it can include the following:

  • Mirrors and Mudguards to ensure riders’ visibility is not compromised
  • Bike helmets which conform to European standard BSEN1078
  • Bells and bulb horns
  • Lights
  • Bike clips and dress guards
  • Panniers, luggage carriers and straps to allow luggage to be safely carried
  • Child safety seats
  • Locks and chains to ensure the bike can be safely secured
  • Pumps, puncture repair kits, bike tool kits and tyre sealant to allow for minor repairs
  • Replacement parts
  • Adaptations for disability/mobility issues
  • Reflective clothing or reflective cycle equipment

 

What are the tax Implications?

Employee Tax Implications

As a result of the Salary Sacrifice Scheme, a basic rate taxpayer, with an income tax of 20% and national insurance contribution of 12%, could see a reduction in taxation of £420 over two years, based on a £1,000 rental agreement.

For higher-rate taxpayers, the CWS could see a greater tax reduction, with a 40% income tax and 2% national insurance contributions being considered.

 

Employer Tax Implications

The reduction in an employee’s total take-home pay results in a reduction of the employer’s national insurance contribution. This rate is currently set at 13.8%. For a £1,000 bike rental, the employer would pay £138 less in national insurance contribution for each employee that utilises the scheme.

Additionally, employers offering the Cycle to Work scheme via a salary sacrifice arrangement need to account for VAT on these payments. Each salary sacrifice payment is considered a taxable supply and must be included in the employer’s VAT return. 

However, an employer can reclaim VAT on the purchase of bikes and equipment. As these purchases are deemed a business expense, they can be written off as expenses in the yearly P&L with VAT claimed back by the business through HMRC.

For many businesses, expenditure on bikes and equipment will qualify for the Annual Investment Allowance (AIA). The AIA enables a business to fully deduct qualifying capital expenses up to £200,000 annually from its taxable profits. If AIA is not available or a business has exceeded its annual total capital expenditure, an 18% allowance per year can be made for bikes or eligible equipment, in addition to main capital allowance pools.

 

What happens at the end of the rental period?

At the end of the rental agreement, employees have four options:

Extend the Hire Agreement:

Employees can extend their hire agreement beyond the agreed rental period. While many CWS providers may have predetermined limits for such extensions, employees should consider if it is beneficial for them to extend the agreement. This is because, according to HMRC, the assumed value of a bike decreases to 0% after six years.

 

Return the Cycle and Equipment

At the end of the CWS rental agreement, typically the employee will return the bike and any associated equipment to the provider.  This return process usually involves the VWS partnering company, which will handle the financial aspects of the bikes disposal.

 

Enter A New CWS Agreement

Most employees who wish to continue utilising the Cycle to Work Scheme will seek to sign a new rental agreement. The employee can hire a new bike and associated equipment, redefining their contract length and monthly payments.

 

Purchase the Bike and Equipment

At the end of the rental period, the employee will be presented with the option to purchase the bike. Should an employee opt to buy, the employer is required to adjust their financial records and eliminate the bike’s remaining value from the company’s assets. This will mean the employee forfeits any tax benefits; therefore, any subsequent purchase agreement must be completely separate from the CWS.

When an employee makes the decision to purchase the bike, they must do so through a one-time payment with the sale recorded in the business’s financial statements.

 

Conclusion

To date, the Cycle to Work Scheme has been adopted by over 40,000 businesses, with over 1.6 million people using the scheme to purchase or hire bicycles in the UK to date. With growing pressure on the government to reduce carbon emissions and congestion, combined with increased investment in cycle paths by local councils, it is likely that the scheme will continue for the foreseeable future.

If you want to learn more about implementing a Cycle to Work Scheme as an employer or the tax advantages as an employee, please get in touch with our team.