Can contractors join the cycle to work scheme?

The cycle to work scheme was designed with permies in mind but there’s no reason limited company contractors can’t make use of it too.

Depending on how you do it, you might need to pay yourself a higher salary, yet this can be done without the salary sacrifice element, writes Andy Chamberlain, IPSE’s director of policy.

What is the cycle to work scheme?

Cycle to work is a scheme that enables employers and employees to utilise tax exemptions to reduce the cost of buying a bike and cycle safety equipment.

It was introduced by the government to encourage commuting to work by bicycle, which has environmental and health benefits.

How does the scheme work?

Most employees think they are buying a new bike when they make use of the scheme -- but they are actually ‘hiring’ it from their employer.

The employer purchases the bike and equipment and loans it to the employee. Typically, the employee then pays for the use of the equipment through salary sacrifice i.e. they sacrifice a proportion of their salary on an ongoing basis.

The salary sacrifice is taken from the gross salary, not the net, which means the employee saves PAYE and National Insurance and the employer also reduces their NI bill.

Technically, the employer owns the bike throughout the hire period. When the hire period ends, they usually sell it to the employee for a notional fee, but they can take the bike back or extend the hire agreement.

Is cycle to work for contractors?

Absolutely, contractors can make use of the cycle to work scheme.

If they want to make use of the salary sacrifice element, they will of course need to be paid a salary by their limited company and they must be left with at least the National Minimum Wage (NMW), after the sacrifice has been deducted.

This could be something of a stumbling block for some contractors who are often advised to pay themselves a salary of somewhere around the National Insurance threshold. This is typically less than NMW (which doesn’t apply to company directors as they are ‘office-holders’).

If this is your situation, you will need to increase your salary in order to make use of the scheme. This will have knock-on impacts on your overall tax position, but by the time you factor in savings you make on the scheme, it could still be worth it!

If your company is VAT- registered, the VAT can be reclaimed and the full value of the bike is allowable as a corporation tax deduction.

Unless you are very savvy when it comes to tax and finances, it would probably be worth discussing the implications of the cycle to work scheme with your accountant, just to make sure it’s what you want to do. For initial information, or to inform that conversation with your accountant, check out the government’s guidance on the scheme.

Can your limited company provide you with a bike, without the salary-sacrifice element?

Yes. It may be that salary-sacrifice isn’t for you. No problem. Your company can purchase a bike (or bikes), and make it available to its employee(s) to ‘borrow.’

This benefit is exempt from tax on employment income. In other words, it’s not like a company car. The only stipulations are that the bike(s) must be available to all employees equally -- which won’t be an issue for most contractors -- and that the bike is primarily used for ‘qualifying journeys’ such as commuting (see below for more info on ‘qualifying journeys’).

Is there a limit on the cost of the bike?

Not anymore. There used to be a £1,000 limit, but it was removed. Some employers will limit the amount they are prepared to loan the employee through the scheme; but as contractors, you have control over any limits.

It’s worth noting e-bikes are also allowable under the scheme and additional equipment can also be included, but there are rules around this so be sensible. As an example, a bike lock is allowable, a brand new Garmin watch which you might use to track your mileage, is not.

Does the bike have to be used for commuting?

Yes -- at least 50% of the bike use should be for ‘qualifying journeys’ such as commuting, or for cycling from one workplace to another. So if you count your home as a workplace and your client’s site as another workplace, and you cycle between the two reasonably often, you should meet this criteria.

It is unclear how, or even whether, the government enforces the 50% rule -- but it is there, and so you should be aware of it, if you intend to make use of the scheme. Happy peddling!

Friday 10th Nov 2023
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Written by Andy Chamberlain

Andy is Director of Policy at the Association of Independent Professionals & Self-Employed (IPSE), the representative body for the UK’s self-employed community, including freelancers, contractors, consultants and independent professionals. He is responsible for IPSE’s tax policy and has a special expertise in labour market changes, employment status and IR35.
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