In the current climate, where attracting and retaining talent is a challenge, many agencies are looking at different ways to incentivise staff to stay with them.

As well as pay increases, flexible working arrangements, bonus schemes, and share options, the Cycle to Work scheme is something that is often talked about.

In this blog, I’ll lay out the key points you need to be aware of, as well as the steps you need to take to set up a scheme in your agency.

What is a Cycle to Work scheme?

The 1999 Finance Act introduced an annual tax exemption, which allows employers to loan bicycles and bike safety equipment to employees as a tax-free benefit. This exemption is known as the Cycle to Work scheme.

Normally when an employee is given a non-cash reward such as this, it is taxable as a benefit in kind. There are some exceptions, however, and the Cycle to Work scheme is one of them.

Under the Cycle to Work scheme, it’s not the gift of the bike itself that’s taxable (as the bike remains owned by the company), it’s the fact that the bike has been loaned to an employee as an interest-free loan. This interest-free loan would normally be taxable as a benefit in kind.

Qualifying Criteria

There are 3 criteria to qualify for the Cycle to Work scheme. These are:

1. The scheme must be available to all employees – This means no group of employees can be excluded from the scheme.

2. Ownership of the bike must remain with the company – So ownership cannot pass to the employee during the period of the loan.

3. The bike must mainly be used for qualifying journeys – More than 50% of journeys on the bike must be for ‘qualifying’ journeys. A qualifying journey includes those made between the employee’s home and workplace, or part of those journeys (for example, to the station), as well as journeys between one workplace and another.

Tax benefits of the Cycle to Work scheme

VAT-registered businesses can recover the VAT on the purchase of the bike.

Capital Gains Tax – The full cost of buying the bike and cycling safety equipment is deductible for Corporation Tax as it qualifies for the Annual Investment Allowance (AIA). This saves you tax at the current rate of corporation tax (19%). 

Brand new bikes are eligible for the super-deduction which means that 130% of the cost of the bike can be claimed as a tax deduction for corporation tax.

PAYE and National Insurance – is not due on the cost of the bike (or the salary sacrificed to loan the bike).

Types of Scheme

Salary Plus

A ‘salary plus’ arrangement is where the company buys the bike and safety equipment and loans it to the employee with no deduction to salary.

Whilst this scheme is easier to administer and is what we’d recommend to Director only companies, it has the downside that the cost of buying the bike is never recovered from the employee.

Salary Sacrifice

In a salary sacrifice scheme, the company buys a bike for their employee and the employee then sacrifices some of their salary each month to ‘hire’ the bike.

This saves the employee PAYE and National Insurance as their taxable salary is lower. The employer also saves NI on the reduced salary.

At the end of the loan period (which is usually 12 to 18 months), the employee can either extend the scheme and continue to loan the bike for free, or make a final payment equivalent to the current market value of the bike, and take ownership of the bike.

Is there a cap on how much I can spend?

Yes and no!

Where a salary sacrifice arrangement is in place, this falls within the scope of a regulated hire agreement.

This means any employer entering into the scheme will need the cover of a consumer credit licence. Luckily the Office of Fair Trading has created a group consumer credit licence, to cover employers setting up Cycle Work schemes. This means they don’t need to apply individually for credit licences to cover their salary sacrifice Cycle to Work scheme.

The group licence covers bicycles and or bicycle equipment up to the value of £1000 (including VAT).

So, whilst there is no limit on the value of the bicycle being purchased through the Cycle to Work scheme unless you want to draw up your own regulated hire agreement, you’ll want to keep the total cost including the VAT of the bicycle equipment lower than £1,000

Getting started

If you’re an agency looking to introduce a Cycle to Work scheme for your employees, get in touch.

We’d love to hear from you!