Cycle to Work scheme reboot: scrap VAT on commuter bicycles

The UK’s Cycle to Work scheme has helped many people onto bikes, but it’s a narrow doorway. You only qualify if your employer offers salary sacrifice; you’re excluded if the deduction would push your pay below the national minimum wage; and because the saving is tied to your tax band, higher earners get a bigger cash discount than everyone else. It’s a useful perk, but not an equitable one.

Who actually cashes in

Under salary sacrifice, a basic-rate taxpayer typically saves about 32% while a higher-rate taxpayer saves roughly 42%. On a £1,000 bike, that’s a £320 saving for the basic-rate earner versus £420 for the higher-rate earner - a £100 advantage for the person who usually needs it least. Meanwhile, many low-paid workers can’t participate at all because the rules rightly prevent salary from dipping below the legal minimum. The self-employed are largely shut out too.

Take VAT off at the till

A VAT waiver would change the geometry of the whole system. Remove 20% VAT at the point of sale for bikes bought for commuting and everyone gets the same proportional saving: £200 off a £1,000 bike, regardless of tax band. There’s no employer to opt in, no payroll admin, and no minimum-wage barrier. It’s also immediately understandable to shoppers and simple for retailers to apply.

Crucially, a VAT waiver would reach far more people. Cycle to Work serves roughly 200,000–250,000 users a year - comfortably under 1% of the UK’s 30-million-strong workforce. A universal, point-of-sale VAT waiver could in principle be used by anyone in paid work buying a commuter bike. Even if only one in ten workers took it up in a given year, that would mean about three million purchases - an order of magnitude more than the current scheme.

The price tag: now vs VAT-free

Using a £1,000 average bike value and 200,000 - 250,000 annual users, the present Cycle to Work scheme likely costs the Exchequer in the region of £88 - £110 million per year once you include both sides of the relief: roughly £60 - £75 million in employee Income Tax and NIC foregone, plus about £27.6 - £34.5 million in employer NIC. By contrast, a VAT waiver scales with uptake. If three million qualifying purchases were made at an average of £1,000, the VAT foregone would be around £600 million per year. Against today’s £88 - £110 million cost, that implies an additional £490 - £510 million - or about £400 million at two million purchases (an extra £290 - £312 million).

Lower prices, more pedalling - and the payback

Removing VAT (20%) cuts the shelf price by about 16.7%, which literature suggests would lift bike sales by roughly 15–25%. If the UK went for a commuter-bike VAT waiver, our earlier “3 million purchases” scenario implies about £600 m/yr in VAT foregone (or ~£400 m if uptake is nearer 2 million). Set against that, the extra riding generated is worth around £32 - £187m/yr in external benefits (health, fewer sick days, decongestion and carbon) with a midpoint around £86 m. That revises the net economic cost to about £410 - £520 m (at 3m purchases) or £210 - £280m (at 2m). Pure fiscal cost to the Treasury would still be the VAT loss, partially offset by extra tax from accessories, servicing and jobs; so in-year cost-neutrality is unlikely. Over a multi-year horizon, however - because health and productivity gains recur - the policy could come close to cost-neutral for society, especially with caps and targeted low-income vouchers.

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Why spend more? Fairness and simplicity

The obvious question is why spend more. The answer is reach and fairness. You’d be buying a universal, simple benefit that finally includes low-paid workers and the self-employed, instead of a niche perk that skews towards higher earners. You’d also be paying for a visible incentive at the point people make their decision - at the till.

None of this requires a blank cheque. A VAT waiver can be sensibly framed to focus support where it matters most. Limiting eligibility to one bike per person every three to five years reduces churn and fraud. Capping the eligible bike value - say at £3,000 - keeps cargo bikes and e-bikes in scope without subsidising ultra-premium purchases.

Top-up for low earners

There’s also an opportunity to add a fairness boost for those on the lowest incomes. France’s national e-bike grant has ended, but many regions still offer local top-ups: flat grants with higher amounts for low-income households and for cargo or adapted bikes. The UK could borrow this idea by layering modest, income-tested vouchers - perhaps £100–£500 - on top of the targetted VAT saving.

Today’s Cycle to Work scheme costs in the order of £88–£110 million a year, reaches a few hundred thousand people, and delivers the biggest cash discounts to higher-rate taxpayers. A VAT-based model would cost more in-year but could reach millions, and finally include the workers the current approach leaves behind. With sensible guardrails and a targeted voucher top-up, it’s a credible, fairer way to make cycling to work mainstream rather than niche - and, over time, close to cost-neutral for society.

Do I need insurance for my Cycle to Work bike?

Yes. Quite apart from all the benefits included in a good cycle insurance policy, if your bicycle is stolen during the 'hire period' of the scheme, you're still liable for the remainder of your payments. Here at the ETA we insure many Cycle to Work bikes - it's quick and easy to get a quote, our policy is fully comprehensive and you can rest assured that you're in safe hands; we're named the UK's most ethical provider by The Good Shopping Guide.

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Cycle Rescue is free with ETA bicycle insurance

If you suffer a breakdown (including punctures, or even a flat e-bike battery) while out cycling, our 24-hour Cycle Rescue team can arrange transport for you and your bicycle to a safe location. Buy as a standalone service, or get it included for free with ETA cycle insurance, along with:

• Theft, accidental damage & vandalism
• E-bike battery theft cover
• Cycle Rescue
• No devaluation of your bike over time
• £2m third party PLUS £20,000 personal accident cover
• Shed and garage storage
• Low standard excess of 5% (£50 minimum)
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The ethical choice

The ETA was established in 1990 as an ethical provider of green, reliable travel services. Over 30 years on, we continue to offer cycle insurance , breakdown cover and mobility scooter insurance while putting concern for the environment at the heart of all we do.

The Good Shopping Guide judges us to be the UK's most ethical provider.

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