Cycling to work is already common in many countries around the world, especially in big cities. Cycling is becoming more and more popular due to the health benefits it provides and how cost-efficient it can be, especially compared to driving. And, due to a UK government’s initiative, cycling can also offer tax benefits.
Under the Cycle to Work Scheme, contractors are able to enjoy healthier commutes to work, healthier staff and reduced environmental pollution. As contractor accountants, we know quite a lot about the Cycle to Work Scheme, so we understand that these benefits are not just felt by employees and contractors, but by the companies they work for as well.
What is the Cycle to Work Scheme?
The Cycle to Work Scheme was introduced by the UK government in the Finance Act 1999 as an incentive for individuals to start cycling to work.
This tax exemption initiative intends to promote healthier lifestyles, to increase levels of active travel and to reduce pollution, and is available for employees and for limited company contractors if they’re the only director/employee of the company. Freelancers, therefore, are unable to use this scheme.
If you’ve received a bike on loan, the Cycle to Work Scheme allows you to pay for it in monthly instalments, after which you can buy it for fair market value if you want.
The Benefits of Cycling
There are many advantages to cycling in general, even if it’s just to and from work.
For example, we’ve mentioned before how important it is that contractors take care of their mental wellbeing; people who lead a physically active lifestyle, including those who cycle, benefit from a boost to their mood, which can help with their mental health. You can choose to ride solo or with people, so you get the chance to socialise as well.
Cycling can promote better lung health as well. Most people who commute by car or by public transport risk being stuck in traffic, which leads to them being exposed to pollution. As a cyclist, you can simply keep on riding or even take cycle paths through low traffic areas, which will help you to reduce the amount of pollution inhaled.
Riding a bicycle often can reduce the risk of developing heart conditions and, because it’s a low impact exercise, it can be done by almost everyone. You don’t have to take up running if you want a good cardio exercise, since runners suffer more from joint inflammation and muscle damage than cyclists.
Cycling can improve spatial awareness and, because it allows for more blood to flow to the brain, it can also improve your cognitive power; this is great to increase productivity as well.
What are the Advantages of the Cycle to Work Scheme?
As we mentioned, the Cycle to Work Scheme offers a wealth of benefits.
When it comes to the planet, cycling instead of driving can cut down greenhouse emissions and reduce pollution levels, so it’s important that people make use of the initiative. In countries like the Netherlands, Denmark and Finland, most households own, at least, one bicycle, while cycling is not as common in the UK.
It is rising in popularity, however, especially due to initiatives like the Cycle to Work Scheme.
This scheme is great for people looking to get healthier and fitter, especially now that summer is here and people spent the last few months indoors. Healthier individuals will be sick less often, which can boost their productivity, something especially important for contractors who own a company.
Many of them can’t afford to take days off to rest if they’re very busy or if they’re just starting out; staying healthy should be a priority.
Staying indoors for such a long time also meant that, now, people want to get out and about and enjoy the outdoors, so what better way to do it than by taking advantage of their commute? After all, commuting can take up a significant part of the day, which is better enjoyed outside than in traffic or on a packed train.
And, if more people cycle to work, the less congested the roads become as well, which helps to improve the air quality and the flow of traffic, including for those using public transport.
What’s more, the scheme allows employers to loan cycles and safety equipment to employees and contractors as a tax-free benefit, which means lower Class 1 National Insurance contributions. The initiative also encourages employees to stay with their employer for longer, so it can aid in employee retention.
The employer can reclaim VAT on the purchase, as well as claim a corporation tax deduction for capital allowances on the full cost of the product. If the company provides safety equipment, such as helmets and high-vis jackets, then these are also considered claimable expenses eligible for corporation tax relief.
Cycling is also cheaper for employees and contractors, who don’t have to spend money on fuel or new tyres, as well as on a bus or train pass.
Who Can Take Part in This Scheme?
Employers of all sizes can introduce the scheme to their employees, so it doesn’t matter whether the business is small or large. It also doesn’t matter if you’re a full-time or part-time employee, or part of the contract staff. Business across the public, private and voluntary sectors can also take part, although the tax and national insurance benefits are only available for those who are considered employees.
To take advantage of the tax benefits, you need to pay your taxes via the PAYE system, be over 18 years old, earn more than the National Minimum Wage after the loan repayment is deducted, and not be on probation.
How the Scheme Works: Employees
If you own a limited company and, therefore, are its employee, you won’t pay a fee for the loan of the bike. The company will simply purchase the bicycle and loan it out.
This is also referred to as a ‘salary plus’ option and means that the employee’s normal salary arrangements are not affected.
The reduced pay amount would be taxable, so income tax and National Insurance will be lower. This method may be the best solution for those who are earning above the personal allowance, and may not be such a good option for contractors drawing a low salary from their company.
How the Scheme Works: Employers
When you purchase the bicycle and the equipment, you can treat the cost of the purchase as capital expenditure and claim capital allowances in the usual way. Most limited company contractors are unlikely to already be using up the entire Annual Investment Allowance available to them, so they can gain a tax saving for the full cost of the purchase.
Do You Qualify for the Tax Exemption?
For the tax exemption to be allowed for both the employer and the employee, it’s important that certain conditions are satisfied.
Ownership of the equipment remains with the company and is not transferred to the employee during the loan period. However, the employee may choose to purchase or transfer the equipment to themselves, which means they will have to pay a market value price at the time of transfer.
In addition, employees have to use the bike and the equipment mainly for journeys between their home and their place of work. Over 50% of their cycling needs to be work-related, so you may still be able to enjoy an after-work ride or cycle in nature during the weekend.
With an increasing number of contractors worried about getting healthy, setting up a Cycle to Work Scheme is a fantastic way to do this while still saving on tax.
Now that lockdown measures have eased up, more people are commuting to their jobs once more, as stores and offices are re-opening. So, the Cycle to Work Scheme is suitable for anyone looking to move a bit more after spending months working from home. Staying healthy, particularly after such a long period of inactivity, is important.
As limited company accountants, we can help you determine whether you’re eligible for the Cycle to Work Scheme and how you can benefit. Just get in touch with us on 0330 024 0406 and we’ll be happy to answer all your questions, be it about this government initiative or about our services.