Cycle to Work scheme and tax allowances
Your employer can either sign up for the Cycle to Work scheme with a participating bike shop or a third-party company such as Cyclescheme to purchase a tax-free bicycle.
Here’s how it works:
- Your employer sings up for the scheme;
- You choose your new bike (this must be from an approved supplier, but you can usually get approval if your shop of choice is not approved already);
- Your employer buys this bike;
- The bike is for your exclusive use, but at least 50% of your mileage should be commuting or work-related travel. You’re not obliged to cycle to work every day;
- The total price of the bike is repaid via salary sacrifice over an agreed period (usually between 12 and 18 months). Because you don’t pay income tax or national insurance on the income you forego you could make considerable savings;
- After the agreed period, you'll usually have the option to purchase the bike on payment of an additional sum to your employer. However, the tax authorities (HMRC) will treat the difference between this amount and the amount they calculate to be the value of the bike at this stage as a benefit in kind, which means you'll have to pay income tax and national insurance on this amount.
In spite of this extra payment of national insurance and income tax, the Cycle to Work scheme still offers employees a considerable saving on the cost of purchase of a bike, as long as the purchase payment at the end of the contract is a fairly small sum. Typical savings on such schemes are 20% to 25%, but can be higher if the scheme is designed so ownership of the bike is transferred after 3 or 4 years so the final payment is substantially lower.
Higher savings were possible in the past when typically the payment at the end of the 12 months was zero and no extra tax was accrued. Now, this does incur tax.
20p is still the maximum an employer can reimburse an employee for business use of their bike. An employee can claim the balance as a deduction from tax.
Visit HMRC for more information.