Cycling salary sacrifice, often known as a Cycle to Work scheme, is a government-backed initiative designed to encourage more people to cycle to work. It allows employees to obtain a bike and cycling equipment, spreading the cost over a set period directly from their gross salary. This arrangement results in significant savings on Income Tax and National Insurance contributions, making cycling more accessible and affordable for many.
What is Cycling Salary Sacrifice?
Cycling salary sacrifice is an agreement between an employee and their employer. Under this agreement, the employee gives up a portion of their gross salary in exchange for a non-cash benefit – in this case, the use of a bicycle and cycling accessories for commuting. Because the salary deduction happens before tax and National Insurance are calculated, the employee pays less tax and National Insurance, effectively reducing the overall cost of the bike.
The scheme typically operates as a hire agreement. The employer purchases the bike and equipment, and the employee then hires it from the employer over a period, usually 12 to 18 months. At the end of the hire period, there are options to take ownership of the bike, often for a small final payment, or return it.
How Does a Cycle to Work Scheme Work?
Participating in a Cycle to Work scheme involves a few straightforward steps. Employers usually partner with a scheme provider, who manages the process.
- Step 1: Employer Registration. Your employer must be registered with a Cycle to Work scheme provider. If they aren’t, you might suggest they look into it.
- Step 2: Choose Your Bike and Equipment. Once registered, you can visit a participating bike shop (online or physical) to select your bike and any safety accessories, such as helmets, lights, locks, and reflective clothing. There’s usually a spending limit, often £1,000, but some schemes allow for higher values.
- Step 3: Get a Quote. The bike shop provides you with a quote for your chosen items.
- Step 4: Apply Through Your Employer. You submit this quote to your employer or the scheme provider. Your employer then issues a voucher or letter of collection to you.
- Step 5: Collect Your Gear. You present the voucher at the bike shop to collect your new bike and accessories.
- Step 6: Salary Sacrifice Begins. For the next 12 to 18 months, an agreed amount is deducted from your gross monthly salary. This deduction covers the cost of hiring the bike.
- Step 7: End of Hire Period. At the end of the hire period, you typically have options. The most common is to pay a small ‘fair market value’ fee (e.g., 3-7% of the original value) to take full ownership of the bike. Alternatively, some schemes offer an extended hire period at no extra cost before final ownership transfer, or you can return the bike.
Who Can Benefit from Cycling Salary Sacrifice?
Most employees who pay Income Tax and National Insurance can benefit from a Cycle to Work scheme. Key eligibility points include:
- Employment Status: You must be an employee, not self-employed.
- Earnings: Your earnings must remain above the National Minimum Wage after the salary sacrifice deduction.
- Employer Participation: Your employer must offer a Cycle to Work scheme.
- Commuting Intention: The bike must be primarily used for commuting to and from work, even if you also use it for leisure.
It’s important to check with your employer about their specific scheme rules and eligibility criteria, as these can vary slightly.
What Can You Get Through the Scheme?
The scheme isn’t just for bikes; it covers a wide range of cycling equipment essential for safe and comfortable commuting. You can typically include:
- Bicycles: This includes road bikes, mountain bikes, hybrid bikes, folding bikes, electric bikes (e-bikes), and even cargo bikes.
- Safety Equipment: Helmets, lights (front and rear), reflective clothing, bells, and mudguards.
- Security: Locks and chains to keep your bike safe.
- Comfort Items: Padded shorts, comfortable saddles, waterproof jackets, and cycling shoes.
- Maintenance: Puncture repair kits, pumps, basic tool kits, and spare inner tubes.
- Child Seats: If you cycle with a child, a child seat can often be included.
The focus is on items that contribute to making your commute safer, easier, and more enjoyable. Consumable items like energy bars or water bottles might not always be included, so it’s best to check with your scheme provider.
The Financial Benefits: How You Save Money
The primary appeal of cycling salary sacrifice is the financial saving. Here’s a breakdown of how it works:
- Income Tax Savings: As the deduction is from your gross salary, you don’t pay Income Tax on the sacrificed amount. The exact saving depends on your tax band (e.g., 20% for basic rate taxpayers, 40% for higher rate).
- National Insurance Savings: Similarly, you save on National Insurance contributions, typically 12% for employees on earnings up to the upper earnings limit.
- Combined Savings: For a basic rate taxpayer, the combined savings can be around 32% (20% Income Tax + 12% National Insurance). Higher rate taxpayers save even more.
- Spread Payments: The cost is spread over several months, making a significant purchase more manageable without needing an upfront payment or credit card.
- No Interest: Unlike traditional loans or credit cards, there is no interest charged on the deferred payments.
Consider a £1,000 bike. A basic rate taxpayer could save approximately £320, effectively paying £680 for the bike over the hire period. This makes a new bike significantly more affordable.
Potential Drawbacks and Things to Consider
While highly beneficial, there are a few points to consider before committing to a cycling salary sacrifice scheme:
- Leaving Employment: If you leave your job before the end of the hire period, you will typically need to pay off the outstanding balance from your net salary. This means you will lose the tax and National Insurance savings on that remaining amount.
- Residual Value Payment: At the end of the hire period, to own the bike outright, you usually need to make a small final payment (the ‘fair market value’). This is a requirement from HMRC to ensure the scheme remains tax-exempt.
- Impact on Other Benefits: Salary sacrifice can sometimes affect other salary-related benefits, such as pension contributions, student loan repayments, or maternity/paternity pay, as these are often calculated based on your gross salary. It’s crucial to check with your HR department.
- Maintenance: You are responsible for the maintenance and insurance of the bike during the hire period.
- Employer’s Scheme Rules: Each employer’s scheme might have slightly different rules regarding spending limits, bike types, and end-of-scheme options.
It’s always wise to read the terms and conditions carefully and discuss any concerns with your employer or scheme provider.
Is Cycling Salary Sacrifice Right For You?
Deciding if a cycling salary sacrifice scheme is right for you involves weighing the benefits against your personal circumstances. If you are looking for a new bike, want to save money, and are committed to cycling to work, it’s likely an excellent option.
Consider your commute distance, the type of cycling you plan to do, and your financial situation. If you’re unsure about long-term employment with your current company, or if your income is close to the National Minimum Wage, you might need to think more carefully.
For many, the scheme offers an unparalleled opportunity to acquire a new bicycle and equipment at a reduced cost, promoting a healthier lifestyle and an environmentally friendly way to travel.
Conclusion
Cycling salary sacrifice schemes provide a valuable opportunity for employees to save money on a new bike and accessories while promoting active commuting. By understanding how the scheme works, its financial benefits, and key considerations, you can make an informed decision about whether it’s the right choice for you. If your employer offers a Cycle to Work scheme, it’s certainly worth exploring the potential savings and health benefits.
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