What's wrong with the cycle to work scheme?

What's behind the bike industry backlash against the UK's only bike buying incentive.

Here in the UK the cycle to work scheme is a big deal. 

For premium bike retailers it can account for 20% - 40% of bike sales. 

If you’re not familiar with the scheme, it’s a tax incentive via your salary. Here’s a quick explainer

There's been a backlash by bike retailers against the scheme in recent months.

The high cost to retailers of selling through the scheme has always been an issue, but has become a real problem as more bikes are discounted to help shift over stock. As a result many bikes are being sold at low or no profit. 

The Association of Cycle Traders is campaigning for reform 

But the high cost of the scheme for bike shops is really a symptom of a more fundamental problem. 

I’ve been thinking about this a lot, and decided to do a series of posts on just what’s wrong with the scheme, and how it might be fixed. I hope this can be a useful resource to understand why the scheme is the way it it and how it might be improved.

It’s a mix of history lesson combined with more than a decade of my experience in developing and delivering cycle to work schemes.

Here’s a summary of the key issues I’ll be covering:

1. A hire scheme doesn’t make sense, and should not involve employers (this post)

2. Salary sacrifice is not inclusive and limits use and access to the incentive

3. Fair market value is outdated

4. The “to work” requirement is out of touch and puts people off

5. Bike retailers should not be funding scheme delivery

6. It’s not measurable, we don’t truly know how many people use it

I know a thing or two about how the Cycle to Work Scheme works

The scheme is over 25 years old, originally created in the 1999 finance act, it really took off in the early 2000’s. 

I spent 11 years running the B2B sales channel at Evans Cycles from 2010 - 2021, operating our own scheme for 2,000 employers and partnering with several other scheme providers. This was a multi million pound business for Evans.

In 2023 I helped to bring to market Gogeta, which is a new player in the market. 

In my time at Evans it accounted for over 25% of bike sales by value. 

That’s because scheme customers typically spend more thanks to being able to trade-up due to the tax break, and spread the cost interest free via their salary. 

It was Evans number one channel for acquiring new customers, with over 60% of scheme users being new to Evans. 

As a marketing cost it made sense. We could acquire new customers, they spend more via the scheme and then improve their lifetime value as they continued to spend with Evans over time. And we knew our margins could just about support the high cost of sale.

Side note: any retailer doing volume sales via cycle to work should know these numbers for their business and whether it stacks up.

This post isn’t about settling old scores, it’s an attempt to clearly lay out why after 25 years the time has come for the scheme to get a full review. With the scheme getting lots of attention these last few months I’ve heard and read many mis-conceptions about how it works and what’s wrong.

Whilst I no longer have a vested interest in keeping the scheme as it is, I do believe we need a bike buying incentive in the UK, to get more people onto e-bikes for shorter journeys.  

Evidence from other countries shows bike buying incentives work, for example in France and various states in the USA. 

We just need the right solution in the UK. The fact that hundreds of bike retailers are campaigning to change or remove an incentive they should be embracing says a lot. 

Given we’re in an election year I’m realistic that it’s unlikely we’ll see an alternative soon, but that doesn’t mean we should delay working on solutions. Or be afraid of raising the issue at all for fear of losing any scheme, even one with big issues.

In this post: why bike hire is a fundamental problem for the cycle to work scheme 

At the heart of the Cycle to Work Scheme guidance, unchanged since 1999, is the requirement that an employer HIRES a bike to their employee.

Those civil servants who created the scheme imagined that an employer would buy a bike, then hire it to their employee. The cost of hire could be any amount, or even a free loan. As long as the employee never owned the bike it would not become a taxable benefit in kind.

Sounds simple, but this is big mistake number one. 

The vast majority of employers will not invest capital in bikes, which would sit on their balance sheet. 

In the early days of selling the scheme to employers, and especially finance bosses, they were nervous about the cost, and the risk, of having unwanted bikes being left in offices or car parks. 

A little market research by those designing the scheme would have identified this problem.

And most employees really want to own a bike, and not return it at the end of a hire period. This remains one of the most common barriers and queries about the scheme. What happens at the end of the hire, will I own the bike?

So that’s how the salary sacrifice element of the scheme came to be created.

Salary sacrifice is a well known way to offer all types of employee benefits, and so it was bolted onto the cycle to work scheme as a way for employers to recover the cost of the bike.

A salary sacrifice agreement means an employee gives up part of their salary before tax in exchange for a benefit. In this case a bike. 

Not only does salary sacrifice enable employers to get their money back, usually over 12 months, this mechanism enables employees to get the tax savings and spread the cost. Reduce your gross pay and you pay less tax. 

And so the modern cycle to work scheme was born. 

BUT, even with salary sacrifice it’s still a HIRE scheme. Keep that in mind.

To this day these are the essential features of how the scheme is delivered, and effectively why scheme providers are required. 

Limits and exemptions

The other issue with hire is that it requires a special kind of exemption from consumer finance rules. 

The original scheme had a £1,000 limit, and it still does, because a regulated hire agreement is required between the employer (or their scheme provider) and the employee. 

For years the scheme limit was £1,000, which put a drag on demand as many wanted to spend more. And as e-bikes became more popular that £1,000 limit was no longer fit for purpose.

In 2019 the rules were changed (after campaigning by scheme providers) so that bikes over £1,000 could be offered, as long as the employer or their scheme provider was authorised by the financial regulator.  

In reality it was the scheme providers who got this authorisation, and created agreements with employers to facilitate the scheme on their behalf. This further locks in scheme providers as being the essential facilitators of the scheme.

There are over 10 scheme providers today. Even though there is only one version of the scheme guidance.

When this new higher scheme limit went live we at Evans saw an almost immediate jump in average transaction value. ATV’s jumped over 20%, from around £700 to nearly £1,000. 

Now almost all schemes have that higher limit, which can be any amount the employer chooses, but tends to be around £2,000 - £3,000.

The fundamental issues with hire are:

• Hire doesn’t really make sense because employers nominally own the bike but the hiring is actually facilitated by scheme providers. And employees almost always want to own the bike. It’s overly complex and most employees never truly understand how or why it's this way.

• The special authorisation to allow bikes over £1,000 is required because of the hire agreement. Again adding unnecessary cost and admin, benefiting scheme providers who are the only ones to have such authorisation.

• Bolting salary sacrifice onto a hire scheme is just adding complexity, and creates expectation of ownership at the end of salary sacrifice. Which is not the case, it’s the cost of hire. In my experience spreading the cost was the one thing people could understand, but the % savings were always hard to fathom as most of us don’t really understand how our income tax is calculated.

If you’ve made it this far, well done and kudos!

Do leave a comment (or message me direct) if you have a view on how to fix the cycle to work scheme, or whether its best left alone.

And please do share with others who you think might find this of value.

More to follow on this subject.

Mark