Tax relief on cycle to work scheme
Written by Ray Coman
The cycle to work scheme was enabled by the 1999 Finance Act which made the loaning of cycles and cycle equipment a tax-free benefit. Usually an employee is treated as receiving a benefit-in-kind when they are allowed to use equipment owned by the employer. The benefit is 20% per annum of the initial market value of the equipment. The annual charge is added to the taxable pay of the employee. However, the use of cycles and cycle equipment is excluded from any such charge, provided certain conditions are met.
How tax relief on cycle to work works
Amount of tax relief for the employee
Salary sacrifice for cycle to work
Employers able to enter a cycle hire agreement without FCA authorisation
Taking ownership of bike at end of cycle to work scheme
Length of hire agreement for cycles
The scope of the bicycle tax exemption
Eligibility of employee for cycle to work scheme
Mileage allowance and tax relief for the self-employed on cycling
How tax relief on cycle to work works
The employer and employee enter into an agreement for a work owned cycle to be provided to the employee for use. The benefit of providing the equipment is not treated as taxable income. On regular pay, the employer is liable to employers’ national insurance and the employee is subject to income tax and employee’s national insurance. Therefore, providing staff with a bike, (rather than the cash equivalent) can save considerable tax for both employer and employee.
Tax relief for the employer
The employer purchases the equipment and can obtain corporation tax relief for the bicycle under the system of capital allowances. The company owned property is loaned to the employee. The benefit of this loan is not treated as a taxable benefit.
The company can reclaim VAT on the bicycle and related equipment. Cycle helmets are zero rated for VAT purposes. A person cannot be VAT registered in their capacity as an employee. Therefore, VAT is a considerable saving on paying someone with a cycle rather than with the cash equivalent.
Earnings or taxable benefits are subject to employers’ national insurance, which is 13.8% at the time of writing. The tax-exempt bike will not be subject to employer’s national insurance.
Amount of tax relief for the employee
Compared with pay in the form of cash, a basic rate taxpayer would save 20% income tax and 12% national insurance, or 32% tax. A higher rate taxpayer would save 40% tax and 2% national insurance, or 42% overall. These rates are applicable to the tax year 2020-21.
Salary sacrifice for cycle to work
The benefit of being able to use the company bike can be treated a perk, i.e. an amount provided in addition to basic salary. However, often the employer will seek to be repaid by the employee. The cash equivalent of the hire charge is deducted from gross pay. Foregoing pay in exchange for a benefit is described as salary sacrifice.
Since the bike is not paid for from take-home pay, salary sacrifice still enables both employer and employee to enjoy the tax, VAT and national insurance benefits. Salary sacrifice is a facility whereby the employer can avoid showing favouritism. An employee, who is effectively paying for the item from their own pay, can be granted greater discretion about cost where salary sacrifice is used. The decision to use salary sacrifice is influenced more by employee relations than it is any tax implication.
Employers able to enter a cycle hire agreement without FCA authorisation
Usually, it is a requirement for a hire company to be regulated by the Financial Conduct Authority. As an exception, provided the value of the bicycle is not more than £1,000 it is not necessary for the employer to be FCA regulated.
Often, the scheme is administered via a Cycle to work provider. In that case the employee enters into an agreement with the FCA regulated specialist provider. The agreement is paid for via salary sacrifice.
Taking ownership of bike at end of cycle to work scheme
To obtain the favourable tax treatment the employee cannot own the bike while it is on loan. However, at the end of the hire agreement the employee can effectively purchase the cycle. One option is to purchase the bike for its market value. In practice, this is the second-hand value of the bike. The valuation of a second-hand bike is contentious especially as the trade in price offered by a hire shop is likely to be less than what could be achieved in a private sale. HMRC could contend any such second hand value used. Therefore, the preferred route is to take the valuation basis.
The table below sets out what can be paid by the employee for the bicycle to avoid being taxed on any benefit in kind. Any shortfall between the value set out below and what is actually paid by the employee will be taxed as employment earnings. The market value is based on complete years of ownership and a percentage of the original price paid:
|
Age of cycle |
Minimum percentage of original price |
|
|
Less than £500 as the original price for the cycle |
More than £500 for the original price of the cycle |
|
|
1 year |
18% |
25% |
|
18 months |
16% |
21% |
|
2 years |
13% |
17% |
|
3 years |
8% |
12% |
|
4 years |
3% |
7% |
|
5 years |
Nil |
2% |
|
More than 6 years |
Nil |
Nil |
To obtain tax exemption, it must be a hire agreement and not a hire purchase agreement. Consequently, there cannot be an option for the employee to be able to purchase the bike at the outset. The contract cannot be set in these terms for the exemption to remain intact. HMRC guidance is that there cannot be an expectation for the bike to be available to buy at the end of the agreement. Any such expectation could be construed as a form of contractual agreement. Tax compliance is better achieved by allowing the bike purchase as a reward for loyalty than as part of the initial entitlement.
Length of hire agreement for cycles
The table above shows that the employee can buy the bike at a 75% discount after just one year. It would be rare therefore for any hire agreement to be less than 12 months. For employment of less than 12 months, the scheme must be for at least the duration of the employment.
An employee can cancel an agreement after 18 months, under consumer rights legislation.
The scope of the bicycle tax exemption
The following items are covered by the cycle exemption:
- Bicycles, tricycles, four wheeled bicycles, electrically assisted bicycles (or e-bikes).
- Bicycle accessories, such as tyres, locks and lights.
- Bicycle safety equipment, such as helmets and child seats.
The following items are excluded from the exemption:
- Motorised vehicles including motor scooters and motorbikes
- Cycle racks, GPS systems and cameras.
There is no limit to the number of bicycles that can be loaned to the same person. This would be practical if the same employee were to be loaned two bicycles to cover either end of a train journey.
Eligibility of employee for cycle to work scheme
Participants in the cycle to work scheme must be over 16, paid via PAYE with an income over the National Living Wage, or National minimum Wage (after deduction of salary sacrifice.)
The cycle to work scheme is not available to the self-employed. However, a director working through a limited company can use the scheme.
Cycle and cycle safety equipment loaned to an employee is not a taxable benefit, provided:
- During the period of the loan, the bike is not owned by the employee. The employee can buy separate equipment and accessories but cannot contribute towards the cost of the bicycle.
- The bike has to be used at least 50% for work purposes. In this context, a work purpose includes both commuting and other business travel. It is not necessary to use the bike every workday.
- The scheme must be available to all employees on comparable terms. It cannot be available only to directors.
The scheme does not require the prior approval of HMRC.
Mileage allowance and tax relief for the self-employed on cycling
Mileage allowance is the amount that can be deducted from taxable income based on a fixed rate for business travel. At the time of writing it is 20 pence per mile for journeys carried out on a cycle. It is not possible to obtain tax relief for commuting. For a sole trader, mileage allowance results in greater ta savings than claiming for relief for the cost of keeping a bike on the road. The exception would be for cyclist with a low mileage. For a limited company the mileage allowance would nearly always work out more favourably, because of the benefit-in-kind charge. The director would be treated as receiving income equal to 20% of the value of the bike each year. This charge could only be avoided if the cycle were used exclusively for work purposes. Mileage allowance is usually the preferred option for cyclists.
It is more in the nature of employment that a person would commute than in the nature of self-employment. This is because a sole trader is less likely to have one paymaster. Commuting only occurs once the worker has spent over 2 years in the same place, where more than 40% of work time is spent. Commuting also occurs where the employment is expected to last more than 2 years from the outset.
For self-employed individuals who work from home, it is unlikely that any journey will be regarded as commuting for tax purposes.
Mileage allowance will be simpler than cycle to work for sole traders or limited company owners who travel to different locations.
Mileage allowance would also be suitable where a cycle is owned at the end of a cycle to work scheme. This means that cycle to work could be used while the cycle is owned by the company and mileage allowance could be used once ownership has transferred to the employee or directors. For employees, mileage allowance is usually reimbursed by the employer as an expense claim. However, to the extent that the mileage is not reimbursed, tax relief can be obtained via a Tax Return or, if the employee does not file a Return, via standalone claim
Cycle to work applies to the purchase of a bike owned by the company. The scheme would not be applicable for cycles already owned by the employee or director.
