The short answer: the risks of running a Cycle to Work scheme are real but manageable, and most of them come down to two things: who owns the bike during the hire, and what your agreements say. The main ones are an employee leaving before the hire is paid off, pay falling too low to keep the salary sacrifice going, a bike being stolen mid-hire, and losing the tax exemption by not offering the scheme to everyone. Admin is mostly signing off requests and running a payroll deduction. Most of the legal paperwork sits with whoever owns the bikes, which is usually the scheme provider.
This guide is for employers who already know the basics and want to know what could go wrong. If you are starting from scratch, read our Cycle to Work guide for employers first: it covers costs, savings and choosing a provider. Here we stick to the risks, the obligations and the questions worth asking before you sign anything.
Start here: who owns the bikes?
Almost every risk question has a different answer depending on how the scheme is set up. There are two broad models.
- The employer hires the bike to the employee. Your organisation pays for the equipment and gets the money back through salary sacrifice over the hire period. Cyclescheme’s employer page describes it this way: once a request is approved, “the employer then pays for the equipment”. If the employee stops paying, it is your money that has not come back.
- A third party hires the bike to the employee. Some providers hire the bikes directly. The Green Commute Initiative’s briefing document puts it plainly: “we hire the bikes directly so the hirer responsibility is ours.” The employer still runs the salary sacrifice, but the hire contract is between the provider and the employee.
Neither model is automatically better. The point is that the answers to “who loses out if this goes wrong?” live in your employer agreement with the provider, so read that document with the scenarios below in mind. Our comparison of Cyclescheme, Cycle2work and GCI covers how the main providers differ in other respects.
Risk 1: an employee leaves before the hire is paid off
This is the risk employers ask about most, and the one with the clearest official guidance. The Department for Transport’s Cycle to Work Scheme Guidance for Employers (June 2019) says: “If the employee leaves their employment for any reason during the period of the salary sacrifice arrangement, you may require them to pay compensation, to cover the costs that you have not recovered under the arrangement.”
In practice, employer policies usually say the outstanding balance is taken from the leaver’s final pay, out of net pay, so the employee loses the tax and National Insurance saving on whatever is left. Where final pay does not cover it, some employers invoice the former employee for the remainder.
Two things make this work, or not:
- Written authority to deduct. Under the rules summarised on GOV.UK, an employer can only deduct from pay where it is required or allowed by law, where the worker’s contract allows it, or where the worker has agreed in writing. The salary sacrifice agreement should say clearly what happens to the balance on leaving, and the employee should sign it before the bike is handed over.
- A plan for when final pay is not enough. Someone with a large outstanding balance and little final pay due can leave you chasing a debt. Capping package values limits how much can be outstanding at any one time. Check whether your provider offers any protection here and what it costs, rather than assuming it does.
If the employee leaves after the hire period has ended, the position is different and depends on the ownership options in place. We explain those in our guide to what happens at the end of the hire.
Risk 2: missed payments and pay that drops too low
With salary sacrifice the employee does not make payments as such: the amount comes off their gross salary before they are paid. The real issue is when pay falls, for example during unpaid leave, a move to fewer hours or a period on statutory pay.
The hard limit is the minimum wage. The DfT guidance says an employee “must not sacrifice salary to a level below” the National Minimum or National Living Wage. If a request would breach that, the guidance gives you options rather than a reason to refuse: you can “offer the employee a lower value package and/or a longer than usual hire period”, or “hire a cycle to the employee without a salary sacrifice arrangement”.
The same guidance flags that salary sacrifice can affect an employee’s entitlement to earnings-related benefits such as Maternity Allowance and to payments such as Statutory Sick Pay. That is something to tell employees before they sign, not something to work out after.
What your policy should cover, in writing:
- what happens to deductions during maternity, paternity or adoption leave, long-term sickness and career breaks;
- what happens if a pay cut would push someone below the minimum wage mid-hire;
- who in payroll checks requests against that limit before approval.
Risk 3: the bike is stolen or damaged
During the hire the bike belongs to the employer or the provider, not the employee. The DfT guidance says the employee is nonetheless “responsible for its appropriate care, maintenance and security”, recommends that employees take out separate insurance or check their home contents policy, and is clear that “Salary sacrifice payments should continue irrespective of any insurance claim.”
So a stolen bike does not, by itself, stop the deductions. The risk for you is an employee who is still paying for a bike they no longer have and who then leaves or disputes the deduction. Make insurance part of the sign-up information, and check what cover, if any, your provider includes. Our guide to bicycle insurance in the UK explains the main types of cover your staff will come across.
Risk 4: losing the tax exemption by excluding staff
The tax break behind the scheme is the exemption in section 244 of the Income Tax (Earnings and Pensions) Act 2003. HMRC’s manual at EIM21664 sets out two conditions: the cycles or equipment must be “available generally to all employees of the employer”, and employees must use them “mainly for qualifying journeys” (HMRC gives these the same meaning as for the works bus exemption). Not everyone has to take a bike. The offer has to be open to everyone who wants it.
This answers a question many employers search for: does an employer have to offer Cycle to Work to all staff? To keep the exemption, yes, broadly. HMRC’s page EIM21665 lists which exclusions are acceptable and which are not.
| Exclusion | HMRC position (EIM21665) |
|---|---|
| Casual or temporary staff employed for a very short period | Acceptable. Where employment is no more than 3 weeks, HMRC accepts that a request could not be processed in time |
| Zero hours employees during periods when they do no work | Acceptable |
| People who are not actually employees, such as work experience students | Acceptable |
| Employees who are incapable of using a cycle | Acceptable |
| Temporary employees in general (other than very short or casual work) | Not acceptable |
| Staff excluded simply because they are on probation | Not acceptable |
| Employees who could ride a bike but might not be able to commute by one | Not acceptable |
Two points trip employers up. First, a probation rule is common in benefits policies, but HMRC does not accept it for this exemption. Second, low earners who cannot use salary sacrifice because of the minimum wage still need a route in: the DfT guidance says the offer must cover the whole workforce, but “does not necessarily have to be through a salary sacrifice arrangement in each case”.
If a scheme fails either condition, the DfT guidance says the cycle “will be considered to be a Benefit in Kind, and employers will be responsible for reporting the taxable Benefit to HMRC”. When both conditions are met, the hire is exempt. That is why the fair access rule is a tax risk as well as an HR one.
For the rules on spending caps and who qualifies from the employee’s side, see our guide to Cycle to Work eligibility and limits.
Risk 5: consumer credit paperwork
A Cycle to Work hire is likely to be a regulated consumer hire agreement under the Consumer Credit Act 1974, according to the DfT guidance. That brings rules on the information given before signing and on the form and content of the agreement itself.
The guidance explains that an employer hiring bikes itself does not need Financial Conduct Authority authorisation as long as the total value of goods hired does not exceed £1,000. Above that, or where a third party such as a scheme provider is the owner, FCA authorisation is needed. Even where the exemption applies, the agreement still has to comply with the Act’s requirements. The guidance also notes that if a hire agreement lasts more than 18 months, the employee has a statutory right to terminate it under section 101 of the Act, which is worth knowing before you agree to a long hire term.
This is the main reason most employers use a provider rather than running a scheme in-house: the provider produces the agreements and, where needed, holds the authorisation. We cover the £1,000 point in more detail in Cycle to Work over £1,000, and hire lengths in our guide to hire term length.
A risk that sits with the employer at the end: ownership
The hire agreement must not include an option for the employee to buy the bike at the end. The DfT guidance warns that this “is likely to make it a hire-purchase agreement”. Any later sale has to be a separate agreement, with the employee paying out of post-tax pay. Handing the bike over for nothing is a taxable benefit in kind that should be reported on form P11D, according to the same guidance. In most schemes the provider manages this step, but check that your agreement says so.
What admin is actually involved?
With a provider, the employer’s day-to-day jobs are usually:
- approving or declining requests, including the minimum wage check;
- setting up the salary sacrifice deduction in payroll and stopping it at the right time;
- paying the provider’s invoice, if you are the one funding the equipment;
- applying your leaver process when someone with an active hire hands in their notice;
- keeping the scheme open to all eligible staff and telling them it exists.
The DfT guidance also says you “should clearly communicate the terms of the arrangements to employees prior to their entering into a Cycle to Work scheme”. A short policy document that answers the questions in this guide covers most of that. The mechanics of the deduction itself are explained in our guide to how salary sacrifice works.
Questions to ask a provider before you sign
- Who owns the bikes during the hire: us or you?
- If an employee leaves owing money, who carries the shortfall?
- Do you offer any protection against leavers or unrecovered balances, and is there a charge for it?
- Who provides the hire agreement, and do you hold FCA authorisation for packages over £1,000?
- How long is the hire period, and can we set a different salary sacrifice period?
- Who handles the end of the hire and any ownership options?
- Are there any fees for the employer, and when are we invoiced?
- Is insurance included for employees, or do they need their own?
Get the answers in writing. They are the difference between a scheme that runs quietly in the background and one that leaves you chasing balances.
Frequently asked questions
Does an employer have to offer Cycle to Work to all staff?
To keep the tax exemption, the scheme must be available generally to all employees. HMRC accepts a few narrow exclusions, such as very short casual engagements, but not probation periods or temporary staff in general. Low earners who cannot use salary sacrifice should be offered another route, such as a lower value package or a longer hire period.
What happens if an employee leaves before the bike is paid off?
The DfT guidance allows the employer to require compensation for costs not yet recovered. Most policies take the balance from final pay, out of net pay, which needs the employee’s written agreement or a contractual term. Who carries any shortfall depends on whether the employer or the provider owns the bike.
Do we need to report Cycle to Work on a P11D?
Not if the scheme meets both conditions of the section 244 exemption. According to the DfT guidance, a scheme that fails either condition makes the cycle a taxable benefit in kind that the employer must report, and giving the bike to the employee at the end without payment should also be reported on form P11D.
Is running a Cycle to Work scheme a lot of admin?
With a provider, it is mostly approvals, a payroll deduction and a leaver process. The heavier legal work, including consumer credit agreements, usually sits with the provider. Running a scheme entirely in-house means taking that on yourself.
This guide is general information based on HMRC’s Employment Income Manual, the Department for Transport’s Cycle to Work Scheme Guidance for Employers (June 2019) and GOV.UK. The DfT guidance states that it reflects the tax and legal position at the time of publication, so check the current position and your provider’s terms, and take professional advice on your own scheme.
