Cycle to Work Scheme Explained: How Salary Sacrifice Reduces the Cost

How the scheme works

Under the cycle to work scheme, your employer purchases a bike (and qualifying safety equipment) and lends it to you under a hire agreement. You repay the cost via a salary sacrifice from your gross pay, spread over the hire period, typically 12 or 18 months. Because the sacrifice comes from gross pay, you never pay income tax or National Insurance on that portion of your earnings. At the end of the hire period, the employer can sell the bike to you at fair market value.

The scheme applies to standard bikes, e-bikes and a wide range of safety accessories including helmets, lights, locks and high-visibility clothing. The equipment must be used at least partly for commuting. The benefit-in-kind rules are exempt for cycle to work equipment, meaning you do not pay any BiK tax, unlike company cars.

Calculating your actual saving

Your saving depends on your marginal income tax rate and your NI rate. For a basic-rate taxpayer (20% income tax, 8% NI), the combined saving is 28%, so a £1,000 bike costs £720 net. For a higher-rate taxpayer (40% income tax, 2% NI above the upper earnings limit), the saving is 42%, the same £1,000 bike costs £580 net. For a Scottish intermediate-rate taxpayer (21% income tax, 8% NI), the combined saving is 29%, giving a net cost of £710.

These figures assume the full sacrifice amount sits within the relevant tax and NI bands. If the sacrifice straddles a threshold, for example if it pushes your income across the NI upper earnings limit, the saving on the excess is calculated at different rates. The calculator can account for this if you enter the correct starting salary and scheme amount.

Employer benefits

Your employer also saves 15% employer NI on the sacrificed amount. On a £1,000 scheme the employer saves £150. Many employers pass this saving on to employees, effectively reducing the gross sacrifice cost. Some larger employers have dedicated cycle to work administrators and absorb all admin costs. Smaller employers may use a third-party scheme provider who charges an administration fee, typically 5–10% of the scheme value, which may reduce (but not eliminate) the net saving.

Limits and eligibility

The scheme is open to all employed people whose employer participates. You must be taxed under PAYE and your post-sacrifice salary must not fall below the National Minimum Wage. As with all salary sacrifice, self-employed people are not eligible because they have no employer to operate the arrangement. Higher-value schemes (above £1,000) may need to be structured as consumer hire agreements rather than standard hire arrangements, which your employer's scheme provider should handle automatically.