How the Cycle to Work Scheme works: The tax free way to get a new bike

It was 1999 when the Cycle to Work Scheme was brought into existence with the aim to get more people cycling to get people healthier and the environment better looked after.

The scheme allows employees to spend tax-free cash on bikes and other cycling equipment which allows them to make a saving of up to 42 per cent.

It was once the case that the scheme was capped at £1000, which really limited people to starter bikes. But now, the government has expanded the scheme and made it possible to get whatever bike, component or kit you like under the new guidelines. This includes electric bikes.

While you get the bike under the Cycle to Work Scheme, you don't actually have to... well... cycle to work. Yes, it does say "at least 50 per cent of the cycle's use must be for commuting to work purposes." 

However, nobody will force you and nobody will be keeping track. The idea is that you at least use it to have a healthier lifestyle.

Things that are obviously not going to be a suitable thing for commuting won't be accepted, such as full-face helmets, but there is nothing stopping you from getting a time trial bike or a brand new road bike.

Evans Cycles use the Ride to Work scheme provider, with a representative telling Cycling Weekly that the average spend is £800, which is a higher figure than before due to inflation.

Sam Jones at Cycling UK told us: “We're absolutely pro the Cycle to Work scheme - you make a saving, it helps people spread the cost out over time, and it helps employers and employees think about cycling."

Recent UK stats show that in the years between 2002 and 2019, whilst there were fewer trips by bike being made, there was an increase in the distance people were cycling. 

Commenting on the scheme's place in the landscape of the cycling industry today, a representative from Ride to Work told us: "It is the most affordable way to get a bike and/or cycling equipment, allowing you to get both a reduced cost, and to spread the payments. It’s like zero per cent finance, but better.

"Likewise with Evans Cycles you can double this up with sale items too. Finally, don’t forget that each time an employee joins a Cycle to Work scheme, employers reduce their own National Insurance Contributions too."

What is the cycle to work scheme?

This scheme lets you buy a bike and/or the necessary equipment tax-free as well as paying it off over the next year in monthly payments.

The Cycle to Work scheme is, in reality, a 'hire period' and after that the company you work for is technically allowed to take the bike back if it wants to do so. You can, of course purchase the bike but for its 'fair market value' which is generally around 25 per cent of the original value. 

In the real world there are several cheaper options and hardly any employer will charge the fair market value.

The fact that the payments are tax exempt means that you get great savings of up to 42 per cent. However, the amount you save of course depends on your tax bracket. The higher your earning rate the more you will save.

But never mind that, you'll be technically getting an interest free loan. How common are they?

Can anyone get a bike on the Cycle to Work scheme?

To get a bike on the scheme, your employer needs to sign up to a provider. These include the Cycle Scheme and Ride to Work scheme.

If you’re self-employed, you can make use of the scheme if you’re set up in a way which means you’re technically employed by your own limited company. Alternatively, you can buy the bike and claim the VAT back via the business.

You must be over the age of 18 to be eligible for the scheme.

Cycle to Work scheme savings calculator

Looking at one individual example, if you’re a standard rate tax payer, and you take out £1000 worth of equipment, your monthly salary sacrifice (payment) will be £83.33. Your savings vary depending upon your tax bracket.

If your gross salary each month was £2000 you would normally pay £640 in combined Income Tax (20 per cent) and NIC (12 per cent).

However, with the £83.33 salary sacrifice taken into account your monthly tax/NIC burden is only £613.34. That means each month you save £26.66.

Over the year you’ll save around £320 (or 32 per cent of £1000 - that’s your combined Income Tax and NIC rate) and pay only £680 towards your £1000 cycling equipment.

And that works across the board. If your total Cycle to Work outlay is £800 you will save 32 per cent on that, so you’ll only pay £544 over the year. 

What happens at the end of the loan term?

So far our calculations haven’t factored in the end-of-term 'fair market value’ if you want to buy the bike outright - throughout the ‘hire’ term of the Cycle to Work deal your employers own your bike and any kit you bought. Although it's questionable if they'll ever want back your smelly shoes or the backpack you spilled the contents of your lunchbox in.

But just in case, here is a table that we put together that explains what the jolly tax people at HMRC want you to pay if you want to own the bike, or other equipment, outright.

But back to the £1000 bike, if you went in at the least financially efficient scenario that would see you buy the bike after the year long loan period, it would set you back £680 of sacrificed salary as well as the £250 final market value. This means you'd pay £930 and saving you an absolute minimum of seven per cent.

Scheme providers have also come up with ways of reducing the final payment, by allowing the employee to continue to lease the bike, to a point where the payment is negligible.

The Cycle Scheme, for example, lets you pay a small refundable deposit to keep the bike for a further three years, after which it becomes yours for no extra cost (and during which you can change jobs and enrol in a new scheme).

The Ride to Work scheme, offered by Evans Cycles, provides a similar service - it recommends you use its Transfer For You scheme where you'll stay in the scheme for a further 48 or 60 months, free of charge. After this, the bike belongs to you. You can instead opt to take ownership immediately, but you'll then need to pay the Fair Market Value rate.

A representative from the scheme at Evans Cycles told us: "With Ride-to-Work the most popular option is to enter a free of charge extended use agreement called Transfer For You. Other options include paying 18 to 25 per cent FMV [fair market value] at the end of the first 12 months, opting to declare it as a Benefit in Kind via P11D, or the final and rare occurrence is some people choose to return the bike to the scheme provider."

Technically, the bike does not belong to you while you're part of the Cycle to Wrok scheme.

Cycling UK made a good point when we spoke to them. Jones told us: "We'd always advise insuring the bike. During the period of the loan [the bike] is the responsibility of the employee, so if it is pinched then you still have to continue paying out."

Who are Cycle to Work providers and which retailers accept which vouchers?

There are a number of different Cycle to Work providers. It’s up to your employer which one they enrol in, and that will impact your choice of bike shop and thus brand, although many bike shops are signed up with multiple scheme providers.

Here’s a look at which retailers use which schemes:

• Evans Cycles – Ride to Work (Evans Cycles own brand), Cycle Scheme, Bike2Work Scheme, Vivup, c2w Support, Green Commute Initiative.
• Halfords Cycles/Cycle Republic – Cycle2Work (Halford's own brand).
• Cycle Surgery – Tax Free Cycles, Cycle Scheme, Bike 2 work, Bike 4 staff (NHS), Cycle Plus, Salary Exchange.
• Wiggle – Wiggle Cycle to Work, Cycle Scheme, Bike2Work Scheme, Cycle Plus and Gemelli.
• Chain Reaction Cycles – Cycle Scheme and Chain Reaction Cycle's Ride 2 Work.
• Tredz – Halfords C2W, Cycle Scheme, Cycle Plus, Bike2Work Scheme, Salary Extras, Enjoy Benefits.

I want to enrol in the Cycle to Work scheme - what should I do first?

Cycle to Work scheme practices vary. But the most common process looks like this:

• Find out what scheme your employer is enrolled in, therefore where you can buy your bike from, and do some window shopping
• Speak to your HR department and request a certificate
• Receive the certificate, take it to the relevant bike shop
• Redeem the certificate against the cost of bike and equipment
• Salary sacrifice commences from your next pay packet

What happens if I leave my job during the hire?

There comes a time when every fish must move to a new pond. Or something like that. People leave workplaces for many reasons - so what happens then?

The employer is perfectly in their right to take the bike back, and use if for other employees as a 'pool bike' - but this is pretty unlikely. In most cases, both the soon-to-be-ex-employee and likewise-employer want the aforementioned to keep the bike.

In this case, the employer will deduct the remaining balance from the final salary. Whether they charge the fair market value on top is up to them. Following this payment, the bike belongs to the former employee.

Explaining the options, Evans Cycles' representative told CW: "If you leave your employer before you have completed the salary sacrifice term, any balance remaining must be repaid from your final net salary, i.e. without tax or NI savings. To take ownership of the bike a transfer of ownership process will also apply within the HMRC Fair Market Valuation guidelines. Your employer will be able to advise which transfer option would apply to you."

Jones said: "If you were concerned at all, you can just say to the employer 'I don't want to keep it', give it back to them and you won't have to pay."

It's also reasonable to ask if your pension or other benefits could be affected by opting into the scheme. The Cyclescheme explains "pensionable earnings are calculated on your gross pay before any salary sacrifice you may have in place."

It's the kind of thing worth running by someone on your side though, Evans Cycles told us: "Generally, the scheme doesn’t affect final salary pensions or other benefits but it’s always best to check with HR or Payroll in advance."