How does the Cycle to Work Scheme operate and what is the benefit of a Cycle to Work Salary Sacrifice scheme?

Tax Question

How does the Cycle to Work Scheme operate and what is the benefit of a Cycle to Work Salary Sacrifice scheme?

Tax Answer

The Tax Exemption

Section 244 of ITEPA 2003 provides an exemption for cycles and cycling safety equipment that an employer loans or hires to employees. This means an employer can provide their employees with access to cycles and cycling safety equipment without creating a benefit in kind tax charge for the employees, provided the following conditions are met:

1. the cycles or equipment are made available generally to all employees, and
2. the employees use the cycle or equipment mainly for qualifying journeys.

It is not necessary for every employee to be provided with or even make use of a bicycle; they just need to have been given the option to do so.

A qualifying journey is primarily one between the employee’s home and their place of work but includes travel between multiple workplaces of the same employer.

The Cycle to Work Scheme

To encourage more taxpayers to make use of the exemption, the Government introduced the Cycle to Work Scheme; a facility that allows employees to obtain a National Insurance saving when hiring cycles and safety equipment under a salary sacrifice arrangement. The hire charge payable by the employee is deducted from gross salary, thereby reducing the amount of pay on which National Insurance Contributions are charged.

By making the cycle available the employer is already providing the employee with a tax-free benefit in kind. The scheme was not intended to also generate a reduction in the employees Income Tax liabilities. To prevent this from happening the salary ‘given up’ must be brought back within the charge to tax as earnings. This allows the reduction in National Savings to be achieved without impacting on the employee’s Income Tax position.

It is important to note that the cycles and equipment available under the scheme must be the property of either the employer or a third-party provider with which the employer has a hire agreement. The employer cannot use the scheme as a method of reimbursement for buying cycles on behalf of employees, nor can it be used to facilitate loans for employees to buy their own cycles and equipment. Likewise, the agreement between employer and employee cannot include an option to for the employee purchase the bike at the end of the hire term.

Further information about the scheme, how it should be operated, and the associated tax and legal considerations can be found in HMRC’s guidance.

EIM21664 – Particular benefits: exemption for bicycles – HMRC internal manual – GOV.UK (www.gov.uk)

Cycle to Work Scheme guidance for employers (publishing.service.gov.uk)

Optional remuneration arrangements (480: Appendix 12) – GOV.UK (www.gov.uk)

Salary sacrifice for employers – GOV.UK (www.gov.uk)

Written by Liz Etherington – Tax Consultant