The Cycle To Work scheme enables employers to purchase a cycle and loan it to an employee for a period of time (normally 12 months). This creates no tax charge on the employee.

After the loan period, the employee has the option of purchasing the cycle from the employer at its market value, which is substantially less than it was when purchased new!

The employer may loan the cycle to the employee completely rent free.  Or, it may be that the employer wishes to recover the cost of providing the cycle and associated safety equipment by charging a rent.  In this case, the employee would make a salary ­sacrifice, which reduces earnings as well as the associated National Insurance (NI) paid by the employer, but provides a valuable benefit.

For example, the employer could purchase a cycle for £450 and charge a monthly rent of £20.  This would only cost a basic rate taxpayer £14 or a higher rate tax payer £11 because the money would be coming out of their gross earnings.

The employer would therefore collect £240 in rent over the 12 months and then the employee could purchase the cycle for a fraction of the original cost using HMRC’s approved market value rates, which in this case would be £81.

In addition to paying less NI, the employer would get capital allowances on the cost of the cycle.  The total net cost to the employer of providing the cycle would be £54 (or £53 if the business was not incorporated). 

The total net cost to the employee would be £241 for a basic rate taxpayer or £217 for a higher rate tax payer.

As you can see, this is considerably less than the original cost of the cycle.

If no rent is charged at all, and therefore no salary is sacrificed by the employee, the total net cost to the employer would be £278 (or £210 if the business was not incorporated) and the employee would just pay £81 to purchase the cycle after 12 months.  The savings in the scenario are not as significant because there is no tax or ­national insurance saving as no salary is sacrificed.

There are a number of conditions which must be met for the tax exemption to apply:-

  • Ownership of the equipment must not be transferred to the employee during the loan period.
  • Employees must use the equipment mainly for qualifying journeys. In this case ‘mainly’ means that more than 50% of time using the cycle and safety equipment must involve a qualifying journey. 
  • Qualifying journeys include journeys made between the employee’s home and workplace and journeys between one workplace and the other.
  • The Cycle To Work scheme must be made available generally to employees of the employer concerned and not confined to directors or offered to them on more favourable terms.

Mileage Allowance

Employers can pay up to 20p per mile tax free to employees who use their own cycles for business travel.  Journeys between home and work are not business travel for this purpose.

Employees cannot claim the 20p per mile tax-free mileage allowance for business travel if they use a cycle loaned to them by their employer.

Any employee considering joining a Cycle To Work scheme will therefore need to consider whether they would prefer to use their own cycle and claim up to 20p per mile tax free for any business miles they travel, or have a cycle loaned to them by their employer.

‘Pool’ Cycles

Employers can also purchase a ‘pool’ cycle which must be kept at the business premises for all employees to use only for qualifying business journeys.  No benefit in kind will arise in this situation.

Employees can make deliveries, collections etc without any tax or national insurance implications.  The cycle must be made available to all employees.  This can also be advantageous to the employer because tax relief will be obtained on the cost of the cycle.

Other Considerations

The calculations assume that the apprenticeship levy does not apply.

If you are providing equipment costing in excess of £1,000 and are charging a monthly rent then you will need to arrange a ­consumer credit licence with the Financial Conduct Authority.

For further help and advice contact Simon Kirkbride or Linette Hall on 01768 864466 or email hello@doddaccountants.co.uk.