What is Cycle to Work?

Key Points

Key Points

In order to encourage healthier lifestyles and to help reduce environmental pollution the UK Government has introduced Cycle to Work Schemes. In addition to the health and environmental benefits of these schemes, they also provide financial benefits to both the employer and employees.

The key points of the Cycle to Work scheme are:

  • The employer buys the bike and/or cycle safety accessories selected by the employee.
  • Most employers can claim capital allowances on the bike and accessories purchased.
  • The employer loans the bike to the employee for an agreed period (normally 12 to 18 months). The employee pays hire charges to the employer through a salary sacrifice arrangement for the duration of the hire period.
  • As a result of the salary sacrifice arrangement the employer saves the employer’s NIC (generally 12.8%) of the salary being sacrificed.
  • The Cycle to Work scheme is only available in the UK.

At the end of the hire period the employer can sell the bike and accessories to the employee for a nominal amount. Alternatively the employer can retain ownership of the bike and accessories and allow the employee to use the bike and accessories with no salary sacrifice.

How do the savings work?

How do the savings work?

Significant savings are available as a result of Government initiatives to encourage healthier lifestyles and to help reduce environmental pollution. Cycling to work is a key part of this initiative.

As a result an employer can provide a bike and related safety accessories to an employee for commuting purposes free of tax (PAYE) and NIC.

The employer can recover the cost of purchasing the bike and safety accessories from the employee by hiring the goods to the employee. The employee pays the hire charges through a salary sacrifice arrangement which results in a PAYE and NIC saving for the employee. Depending on the employers VAT status, the employer can also recover the VAT.

The employer also saves money as there is no Employers NIC to pay on the amount of salary sacrificed by the employee.

What is salary sacrifice?

What is salary sacrifice?

Salary sacrifice is a contractual agreement between an employee and employer where an employee receives a lower salary for an agreed period and in return receives a non-cash benefit from their employer (in this case the hire of a bike and related safety accessories).

The reduction in salary means your National Insurance contributions (and in some cases tax contributions) will be reduced.

How long will the salary sacrifice period last?

How long will the salary sacrifice period last?

The salary sacrifice period is at the discretion of the employer and is usually between 12 and 18 months.

How does salary sacrifice affect an employee’s other benefit entitlements?

How does salary sacrifice affect an employee’s other benefit entitlements?

As a salary sacrifice arrangement reduces an employee's gross salary there may be a knock on effect on other benefits. Although the effect on other benefits is likely to be small the employer should communicate any effects on other benefits to the employee. A salary sacrifice arrangement can potentially impact the following:

  • Pension contributions based on gross earnings
  • Pension received if an employee is close to retirement and has a final salary pension arrangement
  • Entitlement to contribution based benefits like the state pension
  • Entitlement to earnings related benefits like Maternity Allowance
  • Entitlement to work related payments like Statutory Sick Pay

How much can I save?

How much can I save?

Savings for both the employee and employer vary depending on the rate of tax and NI the Employee pays.

A lower rate tax payer (paying 20% PAYE tax and 12% NI) would save approximately 32% off the normal Wiggle price.

A higher rate tax payer (paying 40% PAYE tax and 2% NI) would save approximately 42% off the normal Wiggle price.

Can I take advantage of Wiggle Promotions?

Can I take advantage of Wiggle Promotions?

If the employer buys bikes and safety accessories online then they can take advantage of any Wiggle promotions at that time.

Wiggle Promotions are not available if the employer is paying by cheque or with a voucher.

How much can I spend?

How much can I spend?

The value of the bike and safety accessories to be made available to the employee is at the discretion of the employer. Although there is no formal limit on the value of the bikes and safety accessories that can be provided the maximum is usually £1000.

You can buy any bike and cycle safety equipment

You can buy any bike and cycle safety equipment

Cycle to Work legislation allows for the purchase of up to 2 bikes on the scheme. Where for example; the 1st bike may be used between home and a train station and the second between the destination train station and work.

Safety equipment is not defined in legislation but the Department of Transport have indicated that it can include the following:

  • Cycle helmets
  • Bells and bulb horns
  • Lights including dynamo packs
  • Mirrors and mudguards
  • Cycle clips and dress guards
  • Panniers, luggage carriers and straps to allow luggage to be safely carried
  • Locks and chains to secure the bike
  • Pumps, puncture repair kits, cycle tools and tyre sealant to allow for minor repairs
  • Reflective clothing
  • White front reflectors and spoke reflectors

As the above list is not defined in legislation and has been prepared by the Department of Transport employers may wish to confirm with their local tax inspector that they agree with the guidance given.

Who owns the bike and accessories?

Who owns the bike and accessories?

Through the Cycle to Work scheme your employer is purchasing the equipment and providing this to you under a hire agreement. This allows you to benefit from the tax breaks made available by the government.

At the end of that hire period the employer has the option to sell the bike to the employee at fair market value.

Paying for your order

Paying For Your Order

Spending your Cyclescheme Certificate

For Cyclescheme customers paying with a Cyclescheme certificate; please be aware that we cannot accept an order where a certificate has not been fully spent. Therefor we ask that you spend at least the amount on your certificate or more.

Adding your own funds via Card payment

You may add your own funds to a Cyclescheme certificate order, however this gives you no title to the goods being supplied, and they will remain the property of your employer until you have complete your end of scheme process.

Please note: when purchasing your equipment through your employers end of scheme process; your employer will calculate the residual value of your equipment. Depending on your Employer, this may be the value of your certificate or the value of goods sold, therefor we advise you check with your employer before adding your own funds.

Fair market value

Fair market value

The Inland Revenue have issued the following Valuation Table to help guide employers and employees into coming up with a realistic fair market value. The following table lists realistic % amounts. If ownership of the bike transfers for less, it is up to the employer to prove the reasons this has been done with photographs and other reasonable evidence to support the lesser % transfer - e.g. excessive use and wear. If a value of 10% is used and the Inland Revenue deem that it should be higher than this will result in a benefit in kind for the employee.

The valuation table

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 & over

Negligible

Negligible

How to use the valuation table

  • The original price of the cycle is the price for which it was on sale as new at the time when it was first provided to the employee. In salary sacrifice arrangements this price may be clearly referred to in the documentation. Cycles are normally acquired by employers at arm’s length from unconnected persons and where this is the case, either of the following can be accepted as the original price of the cycle:
    • the amount that the employer paid or was invoiced for the cycle or
    • the retail price of the cycle that was taken into account in working out any hire payments.
       
  • It is acceptable to use the VAT exclusive amount in calculating the original price of the cycle. However, where the valuation percentage is applied to a VAT exclusive amount, VAT will need to be added to the result in order to arrive at the acceptable market value. This must be done regardless of whether or not the employer is VAT-registered. For example, if the original price net of VAT was £400, then whilst the VAT rate is 20%, the acceptable` market value at 2 years old will be £61. ((£400 x 13%) + (VAT at 20% x £52) = £52 + £9 = £61).

Note: This guidance is solely about a simplified method of calculating the value of used cycles in the context of taxable employment income and is not intended to have any bearing on the actual VAT position. Employers will need to refer to the appropriate guidance or seek advice on how to account for VAT on sales of used cycles. 

In calculating the original price of the cycle, include safety equipment fitted to the cycle (such as lights and bells) but not safety equipment which would be worn by the cyclist (such as helmets or reflective clothing). Where used regularly for commuting and/or travel between workplaces, safety equipment worn by the cyclist is likely to have a market value that is lower than the table percentages for a cycle and cycle-based safety equipment.

Does the employee need to use the bike to cycle to work?

Does the employee need to use the bike to cycle to work?

The employee must mainly* use the bike and safety equipment for "qualifying journeys". A qualifying journey means a journey, or part of a journey, between an employees home and workplace or between one workplace and another.

As cycling only part of a journey is required, cycling to and from the station to get a train to work would qualify an employee for the scheme.

* mainly means more than 50% of the time using the bike and safety equipment must involve a qualifying journey. It is the responsibility of the employer to monitor this.

If the bike and safety accessories provided under the scheme are not mainly used for qualifying journeys then the employee may lose the benefit of the PAYE and NIC savings available through the scheme.

Who is responsible for insuring the bike?

Who is responsible for insuring the bike?

The employee is responsible for insuring the bike. Cover can normally be obtained through home insurance. The insurers should be advised that the employer has an interest in the bike.

If the bike is stolen whilst uninsured the employee will continue to be liable for any outstanding hire payments through the salary sacrifice arrangement.

Who is responsible for maintaining the bike?

Who is responsible for maintaining the bike?

The employee is responsible for maintaining the bike.

What happens if the employee takes unpaid leave?

What happens if the employee takes unpaid leave?

If the employee takes unpaid leave, including maternity and paternity leave, the employer will normally extend the salary sacrifice period for the number of unpaid months. This extension to the period of the salary sacrifice arrangement is normally capped at 6 months.

What happens if the employee leaves before he has finished paying?

What happens if the employee leaves his job before he has finished paying for the bike and accessories?

The payment for the bike and safety accessories by the employee is formalised through a Hire Agreement regulated by the Consumer Credit Act. This is a non-cancellable legal agreement. The hire charges under the agreement are made through a salary sacrifice arrangement.

If the employee leaves his employment through any reason during the salary sacrifice period then the employer will normally require the employee to pay compensation. The compensation is generally the employer's costs which have not been offset due to the non-completion of the salary sacrifice arrangement.

This compensation payment will be taken from the employee's final net pay and will not qualify for the PAYE and NIC savings normally available.

This compensation payment may be viewed as a termination fee and should cover the fair market value of the goods in order to transfer their legal ownership from the employer to the employee.

Do we need to advise any Government authority, including the Inland Revenue?

Do we need to advise any Government authority, including the Inland Revenue?

There is no requirement to notify any authority and prior approval is not required. However once the Cycle to Work scheme has been established an employer may wish to check with their tax office that PAYE and NIC does not need to be accounted for any salary sacrificed.