Cycle to work scheme – are limited company directors eligible?

The Cycle to Work scheme is a government initiative set up to promote health and reduce environmental pollution. In this guide, we look at how limited companies and their employees can benefit from the scheme in a tax-efficient way.

In a nutshell, the scheme – which started in 1999 – allows employers to lend their employees cycles and accessories for a set period.

The employee can benefit by hiring the bike and offsetting the cost against their gross salary. The employer benefits by providing a healthy commuting option and may also enjoy some tax benefits.

Cycle to Work scheme – key points

1. There is no formal ‘scheme’ to join, and you do not have to inform HMRC when you create a scheme.
2. It allows employees to obtain bicycles and related safety equipment through their employer, tax-free.
3. The company can usually claim the cost of the bike via capital allowances (often under the Annual Investment Allowance), and reclaim the VAT element too (if the company is VAT-registered and the bike is used for business purposes).
4. Employees effectively “hire” the bike via salary sacrifice, reducing their gross salary. This means they pay less tax and National Insurance.
5. Importantly, the employee must earn above the National Minimum Wage to participate (see below).
6. The employer does not pay 15% Employers’ NICs on the value of the bike loaned to the employee via salary sacrifice.
7. There are no benefit in kind implications provided the scheme conditions are met.
8. Employees can buy the bike at a fair market value at the end of the hire period (typically between 12-36 months).

Can an employer loan a bicycle worth more than £1,000?

When the scheme was first launched, the Government capped the value of each loan cycle at £1,000.

This cap has since been removed. Updated Department of Transport 2019 guidance states that loaned equipment worth over £1,000 is allowed, “provided the requisite Financial Conduct Authority (FCA) authorisation is obtained.”

Are there any eligibility rules I need to be aware of?

• The bike and accessories remain the company’s property throughout the loan period. The employee may purchase the bike at the end of the period (see below).
• At least 50% of the cycle’s use must be for ‘qualifying journeys’, i.e. commuting to work purposes.
• The scheme must be offered to the entire workforce.
• The scheme is not available to the ‘self-employed’ (sole traders and members of a partnership).

In practice, HMRC does not actively monitor the 50% qualifying journeys rule, but the scheme should be used in line with its intended purpose.

What type of equipment is covered by the scheme?

A cycle, tricycle, non-motorised four-wheel cycle, or Electrically Assisted Pedal Cycle (EAPC) will qualify.

The value of safety equipment can also be included in the loan agreement. Although there is no strict definition, ‘safety equipment’ includes items such as helmets, lights, mirrors, locks, and pumps.

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National Minimum Wage considerations for company directors

Importantly, any employees who use this scheme must be paid the National Minimum Wage or National Living Wage. This will be a problem for many directors who typically receive salaries below the NMW, e.g. £9,100 or £12,570.

The NMW is currently £12.21 per hour, which is over £20,000 per year (£12.21 x 52 x 37.5).

If the salary is too low to accommodate the salary sacrifice without falling below NMW/NLW, the director cannot participate in the scheme.

You can opt to increase your salary, although this is unlikely to be tax-efficient.

The company can still loan a bike to a director; however, there are no salary sacrifice benefits.

In practice, many contractor directors take a low salary and higher dividends. Because salary sacrifice reduces gross salary, it is often not possible to use the scheme without breaching National Minimum Wage rules, which limits its usefulness for typical contractor setups.

Can the employee purchase the bike after the loan period ends?

Yes, however when setting up the scheme, there must not be an implied or explicit intention to sell the bike to the employee, otherwise it becomes a ‘hire purchase’ rather than a ‘hire’ agreement.

Look at Annex C of this document to calculate the acceptable disposal values as a percentage of the original purchase price.

For example, if the company loans a bike worth £1000 to an employee, the employee can purchase it for just 25% of its original value (including VAT) after one year and a mere 2% after five years.

Claiming mileage allowance instead of using the scheme

Providing your work isn’t caught by the 24-month rule, employees can claim 20p per mile for work-related journeys as an alternative to joining the scheme.

Importantly, you cannot claim this 20p rate if you already use the cycle-to-work scheme. You can claim mileage only if you use your own bicycle.

If you have any questions about the scheme or your eligibility to participate in it, please contact your accountant.