Updated on: Sep 17, 2023
The cycle to work scheme was introduced by the UK government in 1999 and was expanded in 2019 to help it realise it’s ambition of making cycling to work part of everyday life for commuters. For workers it means cheaper travel and better health, and for businesses this can translate into increased productivity and a happier workforce. And overall, for the UK having a larger workforce who cycle to work means lower congestion, and improved air quality, which helps produce vibrant attractive places and communities.
To make sure the cycle to work scheme got significant uptake it was been designed to be as inclusive as possible so that people travelling to work got the opportunity to be involved in the scheme. New research by Cyclescheme shows that despite the boom in cycling that occurred over the COVID lockdown period, it risks coming to an end due to concerns about lack of time and long term motivation to ride. While over half the workforce want to cycle commute, incentives such as a cycle to work scheme are important to help keep the momentum up. As things stand, the Cyle to Work scheme remains an attractive tax-free benefit for contractors because it means their company can be used to purchase a cycle plus cycling equipment and save money on both income tax and national insurance contributions.
Limited company contractors
If you have your own limited company and are interested in using the cycle to work scheme you may be left confused about how the scheme works and how you can take advantage of it. This is because most of the cycle to work articles you will find online are targeted towards full time employees, and usually talk about salary sacrifice.
The scheme is actually very simple if you have your own limited company so let’s get into the detail of how tax free bikes work with a worked example. While it may also be possible to run a company motorcycle tax efficiently, here we are just looking at normal cycles and e-bikes.
Pete loves mountain biking and usually gets out every weekend with a couple of his friends where they’ll usually ride for two to three hours rain, hail, or shine. Naturally his contractor accountant of choice is No Worries accounting. On his most recent ride he hit a newly fallen tree and cracked his frame, so he is now in the market for a new bike. Pete is a consulting engineer who works through his own limited company and has known about the cycle to work scheme for several years but it’s never got around to actually using it. He has around £8,000 of retained earnings in his business which he was thinking about using to get a new bike.
Pete works from home two days a week and commutes into his client offices for the remaining three days. It takes him around half an hour to get there and half an hour to get back, so all up he commutes about 3 hours a week. This satisfies the first requirement of using the cycle to work scheme with a cycle must be used for the majority of the time in commuting. Note that this use of the cycle is only a rule of thumb, and the main point of the scheme is that you use it to cycle to work. If you cycle to work four times a week but also ride every evening in the local forest and head away every weekend to ride in Wales, you are still satisfying this condition that there is substantial use of the cycle for business related journeys. In fact without getting too carried away with it, you can read about this tax exemption specifically at EIM21664 – Particular benefits: exemption for bicycles.
In terms of what Pete can buy, he is not restricted by the type of bike or the price of the bike. It can be a hard-tail mountain bike, a fully suspended downhill bike, a road bike, or even an e-bike. Plus the scheme covers for the purchase of a bike and cycling equipment, and while this is not defined in the legislation Pete just needs to take a common sense approach to this tax efficient employee benefit. Things like helmets, lights, locks, reflective safety clothing and shoes, mud guards, a commuting backpack, pumps, cycle toolkits, spare chains, and spare tyres are all acceptable. Items that are not included are things like a cycle computer, waterproof clothing that is not reflective, an indoor trainer, and a high performance cycling coach, so do not try an include these in your cycle to work purchase.
In Pete’s case he’s decided to purchase the Vitus E-Sommet 297 VRX Mountain Bike for £4,499.99. Because he wants to make use of the cycle to work scheme, the bike must be purchased by his employer, which in this case is his limited company. He simply needs to pay for the bike from his business bank account and ensure the purchase invoice is made out in the name of his company. He is not looking for any extra safety related gear at the moment, but the reality is for the purposes of this illustration I have just decided not to trawl through various bike websites to get a list of safety related gear and their price. The absolute best time to do this though is when the bike is purchased and that single purchase invoice that you get from the bike shop will contain the bike plus all of the add-ons that you have purchased making your record keeping extremely simple.
Pete’s company is also VAT registered, and because the value of the purchase exceeds £2,000 incl GST, it does not matter if he is on the flat rate scheme or the standard rate scheme, he will be able to claim back the VAT on the bike purchase.
Also, the full value of the bike is available as a corporation tax deduction for the business through capital allowances, so Pete will make a corporation tax saving based on the full value of the bike in the year of purchase.
The cycle to work scheme is free of any taxable benefit costs, so no P11D reporting is required. This means there are no national insurance costs for Pete or his company, and there no income tax for him to pay on the bike and cycling equipment that he purchases.
Remember, under this scenario the bike is owned by the company, and for insurance purposes the company is the owner, so this needs to be factored in when Pete is thinking about insuring the bike.
What Happens to the Bike Eventually?
For most of our clients who use the cycle to work scheme and have their company purchase a bike for them, the bike is transferred into personal ownership when the company is closed down. Usually this forms part of any final distribution of funds made to the shareholder and it is often the case that the bikes value is negligible. If that is not the case, we would advise our clients to get the fair market value of the cycle, and then effectively have the company sell them the bike at that value. Doing so avoids any employee benefit in kind charges and keeps the book work nice and simple.
Lets See The Numbers
If you are thinking about purchasing a bike along with cycling equipment and using it for a significant amount of your business related journeys, then purchasing it through your business is an extremely tax efficient option. Let’s run through the calculation using two scenarios. Scenario one is Pete uses his after tax personal savings to purchase the mountain bike, and in scenario 2 Pete uses his company to purchase the bike as an employee benefit so that it can provide him with a means of commuting to work (along with the ancillary benefits of being able to use it in the evenings and weekends).
Scenario 1
Pete takes a dividend of £4,500 from his business and purchases the Vitus E-Sommet from his local bike store. To keep things simple let’s assume Pete is a basic rate taxpayer. To be able to afford to pay this dividend, his company must have generated a profit of £5,555.55. On this profit the business pays corporation tax of 5,555.55 x 19% = £1,055.55, leaving Pete with £4,500 that he can pay to himself as a dividend. As a basic rate taxpayer, at the end of the tax year this dividend will attract a personal tax bill of 4,500 x 8.75% = £393.75. So altogether the cost of this bike purchase will be 4,500 + 1,055.55 + 393.75 = £5,949.30.
Scenario 2
Pete uses his limited company to purchase the bike. The purchase cost is £4,500 which is 3,750 + £750 in VAT. Pete will get this VAT back in his next VAT return. The company also will be able to deduct the full cost of the bike against its taxable profits, and in this case the corporation tax relief will be 3,750 x 19% = £712.50. So altogether the cost of this bike purchase will be 4,500 – 750 – 712.50 = £3,037.50.
You can see already the vast tax savings in having the company purchased the bike. Pete saves himself £2,911.80 when purchasing the bike through his company. The nice thing about working through your own limited company is that you can stand back and take a look at the overall tax implications across both your personal and business positions, because at the end of the day they both impact how much money ends up in your back pocket.
Other Forms of Cycle to Work Schemes
If you are not a limited company contractor, but instead work through an umbrella firm, similar sorts of tax savings can be achieved though it is through a different process. Our own umbrella company, No Worries Red Umbrella, offers a cycle to work scheme to our umbrella workers through a salary sacrifice arrangement where they save on income tax and national insurance contributions. Full details of the scheme can be found on our cycle to work scheme page. This scheme uses Green Commute Initiative where the bike is loaned to the Umbrella workers over a specific loan period.
And if you are a full-time employee and want to take advantage of the cycle to work scheme to also get income tax savings then get in touch with your employer and ask if it is available. A huge number of employers now offer this scheme as an incentive, and they are relatively easy to run. There are additional conditions due to this being run as a salary sacrifice scheme and they are you must be 16 or over, earn at least national minimum wage after the salary sacrifice has been taken from your pay, and pay tax via the Pay As You Earn (PAYE) system.