The Cycle to Work scheme is a government-backed initiative that allows employees to obtain a bicycle and cycling equipment tax-free through a salary sacrifice arrangement. The employer purchases or leases the equipment and provides it to the employee, who repays the cost through a reduction in gross salary over an agreed period — typically 12 months. Both the employee and employer save on tax and National Insurance.
How the Scheme Works
- The employee chooses a bicycle and safety equipment from a participating retailer
- The employer purchases or leases the equipment (or arranges this through a scheme provider)
- A salary sacrifice agreement is signed, reducing the employee’s gross pay by the cost of the equipment divided by the number of pay periods
- At the end of the hire period, the employee can purchase the equipment at its fair market value, extend the loan or return it
The equipment must be used mainly for commuting (at least 50% qualifying journeys), though private use is permitted alongside commuting.
Tax and NIC Savings
Because the salary sacrifice reduces the employee’s gross pay, savings arise on both income tax and National Insurance:
| Annual Salary Sacrifice | Employee Tax Saving | Employee NIC Saving | Total Employee Saving | Employer NIC Saving |
|---|---|---|---|---|
| £500 | £100 | £40 | £140 | £75 |
| £1,000 | £200 | £80 | £280 | £150 |
| £2,000 | £400 | £160 | £560 | £300 |
| £3,000 | £600 | £240 | £840 | £450 |
These examples use illustrative rates of 20% income tax, 8% employee NIC and 15% employer NIC, and assume all sacrificed pay would otherwise be taxed at those rates. Higher and additional rate taxpayers may save more income tax, while employees earning above the Upper Earnings Limit save NIC only at the lower rate.
Why It Works Under Salary Sacrifice Rules
The Cycle to Work scheme is one of the approved benefits that retains full tax and NIC advantages under the Optional Remuneration Arrangements (OpRA) rules introduced in April 2017. Most other salary sacrifice benefits lost their advantage, but cycles and cyclists’ safety equipment are specifically exempt.
What the Scheme Covers
Eligible Items
- Bicycles — standard pedal cycles, electric bikes (e-bikes with pedal assist up to 15.5 mph), cargo bikes, folding bikes
- Cyclists’ safety equipment — helmets, lights, reflective clothing, bells, locks, mudguards, panniers, cycle clips
Not Eligible
- Motor-powered vehicles (e-bikes exceeding the 15.5 mph pedal-assist limit are classified as motor vehicles)
- Fitness trackers, GPS devices
- Non-safety accessories (e.g. water bottles, phone mounts)
Value Limits
There is no legal upper limit on the value of equipment under the scheme. However, the original scheme guidelines suggested a cap at £1,000. In 2019, the Department for Transport confirmed that employers can offer schemes for any value, provided they comply with Consumer Credit Act requirements. For equipment valued over £1,000, the employer must either hold a consumer credit licence or use a scheme provider that holds one.
Setting Up a Scheme
Employers can run the scheme in two ways:
Self-Managed
The employer purchases the equipment directly and manages the salary sacrifice agreement. This suits larger organisations with internal resources and works well for lower-value equipment.
Through a Scheme Provider
Most employers use a third-party provider (e.g. Cyclescheme, Green Commute Initiative, Cycle Solutions). The provider handles the paperwork, retailer network, consumer credit compliance and end-of-scheme process. The employer pays a small administration fee.
Employer Steps
- Select a scheme provider or decide to self-manage
- Communicate the scheme to employees
- Agree salary sacrifice terms — typically 12 months of deductions
- Amend employment contracts — the salary sacrifice must be a genuine contractual change
- Process payroll changes — reduce gross pay and report through PAYE
- Report as needed — see HMRC reporting below
End of the Hire Period
At the end of the initial hire period (usually 12 months), there are three options:
| Option | Detail |
|---|---|
| Employee buys the equipment | At fair market value — HMRC publishes acceptable percentages |
| Extended loan | Equipment remains with the employee under an extended hire arrangement at a nominal charge |
| Return | Employee returns the equipment to the employer |
HMRC Fair Market Values
HMRC accepts the following minimum percentages of original price as fair market value:
| Age of Equipment | Bikes: Original Price < £500 | Bikes: Original Price ≥ £500 |
|---|---|---|
| 1 year | 18% | 25% |
| 18 months | 16% | 21% |
| 2 years | 13% | 17% |
| 3 years | 8% | 12% |
| 4 years | 3% | 7% |
| 5 years | Negligible | 2% |
If the employee purchases the equipment at or above the fair market value, there is no additional tax charge. If the transfer is at below market value, the difference is a taxable benefit in kind.
HMRC Reporting
During the hire period, there is nothing to report on the P11D because the exemption for cycles and cyclists’ safety equipment applies.
If the employee acquires the equipment at below fair market value at the end of the scheme, the difference must be reported as a benefit in kind on the P11D.
Practical Considerations
- National Minimum Wage — the post-sacrifice salary must not fall below the NMW when divided by hours worked
- Statutory payments — the reduced salary may affect entitlements to Statutory Maternity Pay, Statutory Sick Pay and other payments based on average earnings
- Leavers — if an employee leaves before completing the salary sacrifice period, the employer should have a process in the agreement for recovering the outstanding balance (typically as a deduction from final pay or a direct payment)
- Multiple schemes — employees can apply for a new scheme once the current one ends, with no limit on the number of times they participate