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Income tax, National Insurance and net pay for any UK salary, 2026-27.
A basic-rate employee who sacrifices £1,000 of salary for a bicycle through the cycle to work scheme keeps around £280 that would otherwise have gone to income tax and National Insurance, because salary sacrifice reduces both [1]. The employer saves too: with employer National Insurance now charged at 15% on earnings above the Secondary Threshold, every £1,000 of sacrificed salary cuts the employer's National Insurance bill by £150 [2].
Those savings exist because of a specific tax exemption. Under section 244 of the Income Tax (Earnings and Pensions) Act 2003, a bicycle and cyclist's safety equipment that an employer lends to employees for commuting is exempt from the usual benefit-in-kind charge [3]. The cycle to work scheme is simply the salary sacrifice arrangement that most employers use to deliver that exempt benefit.
This article explains how the scheme works, how the tax and National Insurance savings are calculated for both the employee and the employer, the conditions HMRC attaches to the exemption, the minimum wage trap that catches lower-paid staff, and what happens when the hire period ends.
Key takeaways
- The scheme rests on the section 244 exemption, which removes the benefit-in-kind charge on a loaned bicycle and safety equipment used mainly for commuting.
- A basic-rate employee saves roughly 28% of the cost through combined income tax (20%) and National Insurance (8%) relief; a higher-rate employee saves around 42%.
- The employer saves 15% employer National Insurance on the sacrificed salary, and may also save the 0.5% Apprenticeship Levy where it applies.
- Salary sacrifice cannot take an employee's cash pay below the National Minimum Wage, which limits the scheme for lower-paid workers.
- At the end of the hire, the employee can return, extend or buy the cycle, but the purchase must be a separate agreement at fair market value paid from post-tax income.
What the cycle to work scheme is
The cycle to work scheme is a salary sacrifice arrangement that lets an employer provide bicycles and cyclists' safety equipment to employees in a tax-efficient way [4]. The employer buys or leases the equipment and lends it to the employee, who pays for the loan by giving up an agreed amount of gross salary over a fixed period. Any employer in the public, private or voluntary sector can run a scheme, whatever its size [5].
The point of the arrangement is that the employee funds the bicycle out of pre-tax rather than post-tax income, and the bicycle itself is not taxed as a benefit in kind. For an employer, the scheme is a low-cost, well-understood staff benefit that also reduces the employer's own payroll costs.
The tax exemption behind it
The exemption comes from section 244 of the Income Tax (Earnings and Pensions) Act 2003, which exempts the benefit of a cycle or cyclist's safety equipment that an employer makes available to employees [6]. Without that exemption, lending a bicycle worth £1,000 would create a taxable benefit in kind reportable on a P11D. With it, the loan is tax-free and the employee simply pays for it through salary sacrifice [7].
The exemption applies to the bicycle and to safety equipment such as helmets, lights, locks and reflective clothing, provided the conditions in the next section are met [8]. It does not matter that the employee also uses the cycle for leisure, as long as the main use is commuting.
Why salary sacrifice is the usual mechanism
Salary sacrifice works by the employee agreeing to give up a defined amount of gross salary in return for the loaned bicycle [9]. Because the sacrifice happens before tax and National Insurance are calculated, the employee's taxable pay falls, which is what produces the saving. The salary sacrifice arrangement is normally run over at least 12 months, regardless of how long the underlying hire agreement lasts [10].
A business running wages through HMRC-recognised payroll software for SMEs sets up the sacrifice as a recurring pre-tax deduction, so the reduced gross pay flows automatically into the PAYE and National Insurance calculation each period. The sacrifice has to be a genuine variation of the employment contract, not a deduction from net pay, or the tax treatment fails [11].
The tax and National Insurance savings
The savings come from two separate sources: the employee pays less income tax and National Insurance on their reduced salary, and the employer pays less employer National Insurance on the same reduction. Both are a direct consequence of the salary sacrifice reducing gross pay.
What the employee saves
An employee saves income tax and National Insurance at their marginal rates on the salary they give up. For a basic-rate taxpayer, that is 20% income tax plus 8% employee National Insurance, a combined 28% [12]. For a higher-rate taxpayer, it is 40% income tax plus 2% National Insurance above the Upper Earnings Limit, a combined 42% [13].
The table below shows the saving and the net cost on a £1,000 package spread over a 12-month sacrifice, applying the 2026-27 rates.
| Taxpayer | Combined relief | Saving on £1,000 | Net cost of the cycle |
|---|---|---|---|
| Basic rate | 28% | £280 | £720 |
| Higher rate | 42% | £420 | £580 |
A £1,000 bicycle therefore costs a basic-rate employee around £720 in real terms, and a higher-rate employee around £580 [14]. The saving scales with the value of the package, which is why the scheme is often used for more expensive electric bikes rather than only budget commuter cycles.
What the employer saves
The employer saves employer National Insurance on the sacrificed salary. Since employer National Insurance rose to 15% on 6 April 2026, the employer saves £150 on every £1,000 of salary an employee sacrifices [15]. On a workforce taking up the scheme in any number, that relief adds up across a payroll.
Where the employer pays the Apprenticeship Levy, the sacrifice also reduces the pay bill on which the 0.5% levy is charged, giving a further small saving [16]. The employer's saving is genuine cash back on an existing cost, which is part of why the scheme is attractive to offer even though it is the employee who funds the bicycle.
Who can join and the conditions HMRC sets
The tax exemption is not automatic. It depends on the scheme meeting conditions set out in HMRC's guidance, and a scheme that fails them loses the exemption and creates a taxable benefit instead [17].
Availability to the whole workforce
The exemption requires that the cycles or equipment are available generally to all employees of the employer [18]. Not every employee has to take one up, but the offer must be open to all who wish to. The offer does not have to be on identical terms for everyone, so a pooled-cycle arrangement for some staff and a salary sacrifice scheme for others can both sit under the exemption [19].
Where an employer excludes some employees from the salary sacrifice route, for example because the sacrifice would take them below the minimum wage, the exemption still holds only if loaned cycles remain available to those excluded employees by another route [20]. The tax and National Insurance reliefs apply only to staff who are employees for tax purposes, so the self-employed cannot use the scheme [21].
Mainly used for qualifying journeys
The second condition is that the employee must use the cycle mainly for qualifying journeys, meaning commuting between home and work, or travel between workplaces [22]. Other use, such as leisure or family cycling, does not break the exemption as long as it is not the main use. HMRC treats the test as met unless there is clear evidence that less than half the use is on qualifying journeys, so employers are not expected to log mileage [23].
The minimum wage trap
The most common compliance problem with the scheme is the interaction with the National Minimum Wage. Because salary sacrifice reduces an employee's cash pay, it cannot be used to take that pay below the minimum wage for the pay reference period [24]. Sacrificed salary is no longer cash pay that counts towards the minimum wage floor.
For a worker on or close to the National Living Wage of £12.71 an hour, even a modest monthly sacrifice can breach the floor [25]. Where that is the case, the employer can offer a lower-value package, spread the sacrifice over a longer period to reduce the monthly amount, or hire the cycle to the worker without using salary sacrifice at all [26]. Checking each participant's remaining hourly rate before the scheme starts is the only reliable way to avoid an accidental underpayment, and small business payroll that flags the breach before the payrun removes the risk.
The £1,000 value limit and FCA authorisation
A persistent myth is that the cycle to work scheme is capped at £1,000. There is no tax cap on the value of the bicycle [27]. The £1,000 figure relates to consumer credit regulation, not tax. An employer that owns the equipment and hires it to employees can rely on a group licensing exemption only where the total value is £1,000 or less [28].
Above £1,000, the scheme is still available, but the provider of the hire agreement needs the appropriate Financial Conduct Authority authorisation, and most commercial scheme providers hold it [29]. This is why schemes offering electric bikes worth £2,000 or more operate routinely. The tax exemption on the benefit is unaffected by the value; it is only the consumer credit treatment that changes above the threshold [30].
What happens at the end of the hire period
The end of the hire is where employers most often get the tax treatment wrong, because the original agreement cannot promise the employee ownership of the bicycle [31].
The three options
At the end of the hire period, the employee can extend the hire, return the cycle and equipment, or buy them under a separate agreement entered into at that time [32]. The initial salary sacrifice agreement must not contain an express or implied option to purchase, because that would turn it into a hire-purchase arrangement and lose the tax exemption [33]. A hire agreement that runs beyond 18 months also gives the employee a statutory right to terminate it under the Consumer Credit Act 1974 [34].
Valuing a cycle sold to the employee
Where the employee buys the cycle, the price must reflect its fair market value, and any payment comes from post-tax income [35]. If the employer charges less than market value, the difference becomes a taxable benefit. HMRC publishes a simplified valuation table that employers can use instead of obtaining a formal valuation [36].
| Age of cycle | Original price under £500 | Original price £500 and over |
|---|---|---|
| 1 year | 18% | 25% |
| 18 months | 16% | 21% |
| 2 years | 13% | 17% |
| 3 years | 8% | 12% |
| 4 years | 3% | 7% |
| 5 years | Negligible | 2% |
The percentages are applied to the original price including VAT [37]. Many scheme providers manage this step by charging a small refundable deposit at the outset and extending the hire for a further period, so the market value has fallen close to zero by the time ownership transfers, which is a legitimate way to keep the final cost low [38].
How the scheme sits in payroll
Most salary sacrifice benefits lost their tax and National Insurance advantage when the optional remuneration arrangement rules came in, but the cycle to work scheme is one of a short list of benefits that keep the advantage [39]. Alongside pension salary sacrifice, childcare and ultra-low emission cars, employer-provided cycles are an excepted benefit, so the saving survives the optional remuneration rules in full [40].
Because the benefit is exempt, there is no P11D entry and no Class 1A employer National Insurance charge on the bicycle, which keeps the year-end reporting simple [41]. Accountants administering the scheme across several employers typically handle the recurring pre-tax deduction through a multi-client payroll dashboard, so the reduced gross pay and the National Insurance saving are applied consistently on every payrun. For the wider picture on how taxable benefits are reported, the guide to benefit-in-kind tax sets out what does and does not need a P11D.
Work out the take-home impact
Before setting the sacrifice amount, an employer can model the effect on an employee's net pay with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross salary and deduction.
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
The cycle to work scheme is one of the few salary sacrifice benefits where the tax and National Insurance advantage has survived intact, which is what makes it worth offering even as the wider salary sacrifice landscape tightens. The mechanics are straightforward once two points are clear: the bicycle is a loan funded from pre-tax salary, and the employee only owns it through a separate transaction at fair market value afterwards. The savings, around 28% for a basic-rate employee and 15% for the employer, come directly from reducing gross pay.
The scheme also sits inside a shifting policy backdrop. A reform to salary sacrifice for pension contributions takes effect from 6 April 2029, which has focused attention on salary sacrifice arrangements generally, but the cycle exemption rests on separate legislation and is not affected by that change. For employers, the practical work is in the detail that is easy to miss: keeping the scheme open to the whole workforce, checking that no participant drops below the minimum wage, and handling the end-of-hire ownership step correctly so the exemption holds from start to finish.
Frequently asked questions
How much does an employee save on the cycle to work scheme?
A basic-rate taxpayer saves around 28% of the cost of the bicycle, made up of 20% income tax and 8% employee National Insurance on the salary they give up [12]. A higher-rate taxpayer saves around 42%. On a £1,000 package, that means a net cost of roughly £720 for a basic-rate employee and £580 for a higher-rate employee, spread across the salary sacrifice period.
Is there a £1,000 limit on the cycle to work scheme?
There is no tax limit on the value of the bicycle. The £1,000 figure relates to consumer credit rules: an employer can rely on a group licensing exemption only up to £1,000 [28]. Above that, the scheme still works, but the hire agreement provider needs Financial Conduct Authority authorisation, which most commercial providers hold, so electric bikes worth well over £1,000 can be offered [29].
Can an employee on the minimum wage use the cycle to work scheme?
Not if the salary sacrifice would take their cash pay below the National Minimum Wage for the pay reference period [24]. Because sacrificed salary no longer counts towards the minimum wage, a lower-paid worker may need a smaller package, a longer sacrifice period, or a hire arrangement outside salary sacrifice [26].
Does the employee own the bike at the end of the scheme?
Not automatically. At the end of the hire the employee can return the cycle, extend the hire, or buy it under a separate agreement at fair market value [32]. The original agreement cannot include a promise to transfer ownership, because that would make it a hire-purchase arrangement and remove the tax exemption [33].
