Research and analysis

The Cycle to Work Scheme: Economic analysis of the bicycle market’s implications for the scheme’s success

Published 24 April 2025

The views expressed in this paper are those of the authors and do not necessarily represent those of HM Revenue and Customs. Any remaining errors are the authors’ own responsibility.

August 2023.

K O’Mara, J Carr, S Kremer, T Glinert.

1. Executive summary

The government provides a tax relief through allowing salary sacrifice for the Cycle to Work scheme which results in a discount on the loan of new bicycles and accessories for employees and spreads the cost in an interest-free way by deducting it from their monthly salary. The salary sacrifice tax exemption for the scheme was introduced with the aim of encouraging employees to commute to work using bicycles.

This economic research paper can be viewed alongside findings from the evaluation of the Cycle to Work Scheme, which HMRC externally commissioned to Ipsos, to form a comprehensive evidence base on the scheme ^{[footnote 1]}.

This economic research paper will:

• outline the economic theory surrounding the incentives and outcomes the scheme may elicit, and the conditions under which these outcomes may continue to prevail in the market

• set out the outcomes we would want the scheme to elicit to explore how the scheme design may incentivise these outcomes

• use the incentives identified to infer if the scheme design is set up to best reach its objectives

Less competitive and undesirable outcomes that are detrimental to employees and to the Exchequer could be an unintended consequence of the Cycle to Work scheme design, in 2 main ways:

• the scheme generates the possibility for the creation of a new submarket, which is less competitive than the wider bicycle retail market, as each scheme provider is granted a sole access scheme users by the employers they work with

• employers could allow perverse outcomes due to the incentives they are faced with. The NICs saving for employers aligns with increased revenue for retailers. Further to this, employers are faced with an administrative burden from offering the scheme, and large scheme providers take this burden away for no cost. Both incentives discourage employers to screen scheme providers with less competitive behaviours

A scheme specific submarket creates the potential for less competitive outcomes such as directly reducing the product lines available and directly hiking prices, as well as indirect product restriction through having access only to specific retailers, which also impacts on price ranges.

Both direct price hiking, and a reduction in product choice relative to the wider market will reduce use of the scheme and shift scheme users towards higher income and prior cyclist groups, therefore reducing the scheme’s success in encouraging take up of cycling and increasing its Exchequer cost ^{[footnote 2]}. The extent to which this is taking place is unknown, and hard to measure.

The combination of having a need for this scheme provider market, and the players in this market chosen by employers instead of employees illustrates how the Cycle to Work scheme design could lead to a less effective outcome.

2. Introduction

The Cycle to Work scheme allows employees to lease bicycles from their employer through a salary sacrifice arrangement, such that they receive tax relief at their marginal Income Tax and employee NICs rate on the lease of the bicycle. The Cycle to Work scheme exists due to the Government allowing a tax exemption to facilitate the salary sacrifice element of this employer provided benefit in kind. This paper will refer to this tax exemption as ‘the scheme’. At the end of the lease agreement, the majority of scheme users intended to buy their bicycle or equipment, with a quarter planning to continue leasing it. The scheme effectively provides a tax relief discount on the provision of new bicycles and accessories for employees and spreads the cost in an interest-free way by deducting it from employee’s monthly salary.

Salary sacrifice describes an arrangement where an amount is taken from an employee’s salary pre-tax, so the employee will not pay Income Tax or Class 1 Primary (employee) National Insurance Contributions (NICs) on this amount, and the employer will not pay Class 1 Secondary (employer) NICs.

Commonly, scheme providers are used to facilitate the scheme for the employers, employees and bicycle retailers. The Cycle to Work scheme does operate without scheme providers, with employers offering vouchers to cycle shops, or making the purchases themselves and renting them to employees, however use of scheme providers is more common.

This paper will consider how economic theory can inform how the Cycle to Work Scheme may be functioning, and the outcomes we do and don’t want to find.

Further, this paper will draw on the findings of Ipsos’s evaluation of the Cycle to Work Scheme ^{[footnote 3]}, externally commissioned by HMRC, to support or challenge the inferences of this economic research. Throughout this paper, findings from Ipsos’ evaluation are referred to as ‘Ipsos’s evaluation findings’ or ‘Ipsos’ evaluation’.

Whilst effectively modelling the market is a complex task requiring data we do not hold, by considering the economic incentives generated by the scheme design, inferences can be drawn on if the Cycle to Work Scheme is set up to function successfully.

3. Economic theory

This next section draws on economic theory to outline:

1. the outcomes we expect to see from the introduction of the Cycle to Work Scheme
2. the undesirable outcomes
3. how these unwanted outcomes (if they materialise) could be an unintended consequence of the scheme design

The following section includes explanations that for ease of understanding may suggest that the bicycle provided through the Cycle to Work Scheme is purchased by the individual at the time of entering into scheme use. The Cycle to Work Scheme does not function in this way, and so this is not technically the case. The scheme utilises a tax exemption in respect of the provision of a bicycle (and equipment) to an employee from the employer where there is no transfer of ownership. A transfer of ownership can occur after the end of the lease period however this cannot be guaranteed and does not have to be accepted. In reality, over half of scheme users were found to be intending to transfer ownership of their bicycle at the end of their lease period, and so it may be the case that employees consider the bicycle as their own purchase from the beginning of the lease period, either due to an expectation of ownership or due to lack of understanding that they do not own it already. Any suggestion that the bicycle provided through the scheme is purchased throughout this paper is therefore made with the employee perspective in mind and does not reflect the legislative backing of the Cycle to Work Scheme.

3.1 Expected outcomes in a best case scenario

Tax relief increasing demand for bicycles

The introduction of the tax relief reduces the cost of provision for a bicycle and spreading of the cost increases affordability.

For those who would consider buying outside of the scheme but were discouraged by the current market price or ability to save, there is now an increased incentive to gain provision of a bicycle through their employer. Others may already own a bicycle, but have considered owning another, or upgrading.

Ipsos’s evaluation found a range of non-price factors for people not using the scheme, including journeys being too long and safety concerns, which may dampen the increase in demand from prospective new cyclists.

31% of scheme users had used the scheme more than once in the past 5 years, mostly out of choice rather than due to the first bicycle breaking. Furthermore, 62% of users already owned or had access to a bicycle before joining the scheme showing how the tax relief likely incentivises upgrades amongst keen cyclists.

We would expect the Cycle to Work Scheme to increase demand for bicycles both for those who do not currently cycle to work, and for repeat purchases or upgrades.

The extent to which the scheme incentivises those who already cycle regularly, versus new cyclists, will depend on how important price is in the decision to cycle, or if other factors such as safety or distance are the limiting factors.

Quality hiking through increased demand: income vs substitution effects

The introduction of the tax relief may shift individuals who were already planning on making a purchase towards choosing a higher quality or higher priced bicycle when provided through the scheme. This is consistent with Ipsos’s evaluation findings on median bicycle and equipment spend through the scheme of £750 and £150 respectively, and 34% of users having chosen bicycles priced at over £1,000.

Bicycles come in many different specifications, so in addition to the question of whether to acquire a bicycle or not, there is the question of which to choose.

For an individual intending to spend money on a bicycle, and on many other goods available to them (such as other transport, or food, housing, or luxuries), the introduction of a tax relief can impact the amount of their budget (or salary) they are willing to allocate to a bicycle versus the amount they spend elsewhere. If we assume an individual will only purchase one bicycle at a time, regardless of if they already own one, any change in the budget allocated to bicycles will reflect a change in quality of the bicycle chosen. This change in the budget allocated to bicycles versus other spending areas can be understood through income and substitution effects, as below.

Income effect

The tax relief acts as a price change, or a change in purchasing power for bicycles of all qualities in the spectrum. For a consumer that needs their salary to cover a bicycle and all other goods they wish to purchase, their budget can now stretch further as one of the goods (the bicycle) is cheaper than before.

This is an income effect resulting from the increased purchasing power from the tax relief, meaning the consumer can now afford to purchase more of all goods than they previously could, as well as a more expensive bicycle.

Substitution effect

This consumer will of course have a choice over what they spend their budget on, and this will be determined by preferences for bicycles vs all other goods, and by prices.

“Normally I wouldn’t have looked at bikes that expensive, but because of the scheme I got a bike of higher value”

Quote from a scheme user interviewed through Ipsos’s evaluation.

As the price of a bicycle of a given quality is now lower than before, there is an incentive to substitute towards purchasing a higher quality bicycle (allocating more budget to bicycles), and away from spending money on other goods. This is the substitution effect, brought on by a change in relative prices.

Net effect

These 2 effects unambiguously push consumers towards purchasing a higher quality bicycle, and so ‘spending’ the tax relief on increased quality.

However, it isn’t clear whether the net effect will depress demand for other goods, increase it or leave it unchanged. This will depend on individual preferences shaping the strength of the income and substitution effects. This cannot be empirically measured due to insufficient data.

This will also benefit employers through higher NICs relief, and scheme providers or retailers through a movement in demand from lower to higher quality (and price point) bicycles.

Quality hiking doesn’t necessarily imply a ‘bad’ outcome from the scheme. If there is a relationship between bicycle quality and intensity of bicycle usage, there may be health and environment benefits.

“I don’t think I would cycle to work without the scheme as I wouldn’t have got a decent bike, it would have been sub-standard which I wouldn’t have felt as confident using. I wouldn’t trust it as much as an old bike. Having a more expensive bike makes you want to use it more.”

Quote from a scheme user interviewed through Ipsos’s evaluation.

However, any such relationship may not be linear. For example, those at the lower quality/price point may be making decisions based on minimising commuting costs, and so will use the bicycle daily, whereas those moving from a middle to high quality/price point may decide to cycle more in response to the quality of the bicycle (opposed to in response to owning the bicycle).

3.2 Undesirable outcomes

Direct price hiking

Direct price hiking refers to increased demand causing the bicycle retailer or the scheme provider to raise the price of bicycles offered through the scheme such that it is higher than it was on the open market pre-tax relief. It is possible retailers will absorb some of the benefit of the tax relief.

Economic theory predicts that price hiking is a likely outcome from the introduction of a tax relief or other form of Government subsidy and has been evidenced before in other policy areas, such as housing ^{[footnote 4] [footnote 5]}.

Employers choose a scheme provider they would like to work with. Presumably they will make this decision based on cost and benefit to themselves, and employee satisfaction in that offering the scheme will form part of their employee remuneration package. They may not fully consider or be aware of the value for money represented by the scheme provider they choose.

Once obtaining a contract with an employer, scheme providers may have the incentive to directly hike the prices of the bicycles on offer up until the point where doing so will no longer increase their profits.

Increasing prices may turn some customers away from purchasing, but still increase profits. Since employees have the benefit of the tax relief, there is room to increase prices substantially before they choose to switch to purchase from the wider market, or not at all.

These higher prices may result in some consumers choosing not to purchase a bicycle, and this effect is likely to be strongest amongst prospective new cyclists where the comparative price of substitute products such as second-hand bicycles, or other commuting methods will be more relevant. This could shift the population of remaining scheme users towards higher income and prior cyclist groups, which is evidenced through Ipsos’s evaluation findings where 62% of scheme users owned or had access to a bicycle before using the scheme, and scheme users were more likely to be higher rate taxpayers relative to the UK population (30% compared to 16%).

Direct price hiking will redistribute up to the full tax relief saving towards the scheme provider or retailer and away from the employee. This limits the success of the scheme through lower prices not being passed on.

Restricting the range of bicycles

Scheme providers could choose to offer only a subset of bicycles from the wider market through their scheme, by excluding certain retailers or brands, or by restricting products within a retailer. This could be an active strategy, or more indirect through not restocking certain bicycles.

Employees face the choice to buy any bicycle they choose from the open market or choose one of a small subset with a tax relief discount.

For some the purchasing decision will be unchanged, opting for the same bicycle but with the tax relief discount. For others, they would have chosen a different bicycle in the open market from those offered on the scheme. The scheme bicycles being reduced in price through the tax relief will cause some employees to substitute towards choosing from the reduced subset of bicycles.

This gives an incentive for the retailer or scheme provider to select the subset of bicycles that maximises their profit. This could be higher priced bicycles, with higher profit margins attached to them.

However, some prospective scheme users may choose to not purchase a bicycle as a result of the restricted product range. This is likely to disproportionately impact potential new cyclists and lower income individuals, who may be considering the more entry level product ranges and are unable or unwilling to substitute to higher priced bicycles. This will also act to shift the population of remaining scheme users towards higher income and prior cyclist groups.

The impact of restricting available products is indirect price hiking and distorted choice. This means the full benefit of the tax relief is not felt by the employee, and the scheme is less effective at encouraging increased take up of cycling compared to a full product range that would fit within all budget constraints.

Other undesirable outcomes

In addition to direct price hiking and product restriction, there are negative outcomes resulting from the actions of consumers.

Some of these outcomes may include: (i) highly repetitive scheme use; (ii) the re-sell of bicycles; and (iii) bicycles being provided but not used.

Repetitive users of the scheme having represented a roughly a third of scheme users, and 62% having owned or had access to a bicycle before using the scheme may suggest that the Cycle to Work Scheme is a successful incentive mainly for keen cyclists, who are more likely to have chosen to purchase a bicycle in any case, rather than successfully targeting those who would be new to cycling. For this group, it’s more likely that the price of new bicycles is not the limiting factor to cycle to work, and potentially second-hand bicycle prices, or other factors are more important. Ipsos’s evaluation findings found safety and travel times were the biggest preventative factors for those who are eligible to use the scheme but do not.

3.3 How are these outcomes influenced by scheme design?

The creation of a new market with less competition

Without use of the Cycle to Work Scheme, individuals would go directly to retailers and have full choice between which retailer and product they wish to choose.

Where there is sufficient competition, if a retailer chooses to increase prices, consumers can easily decide to purchase from a different retailer instead. This incentivises retailers to keep prices low and protect their profits from being harmed through a loss of consumer business.

This dynamic functions best when: (i) there are a large number of retailers in the market which are all providing similar goods; (ii) new retailers can easily join the market; and (iii) consumers have full information.

• without a vast range of similar retailers, consumers are unable to easily compare price and quality or switch between sellers

• unless new retailers are able to easily join the market, existing retailers can profit by putting up prices, without new entrants undercutting them and diverting business. New entrants join the market when they see profitability and offer lower prices to gain business. This helps to keep the prices in the market low and stable relative to costs of supplying ^{[footnote 6]}.

• finally, consumers need full information on the products they are buying and what else is offered in the market, or they are unable to effectively compare retailers and switch to get a better deal

Conceptually, the wider bicycle market could be described as displaying monopolistic competition as it meets most of these above conditions; there are many retailers competing against each other over differentiated bicycle. Under monopolistic competition retailers have a small degree of market power and can set prices to generate a profit. This can be viewed as the baseline scenario as the Cycle to Work scheme is not intending to impact competition in the market.

Further divergence away from these conditions results in the market moving away from a state of monopolistic competition, where mark-ups are relatively small.

Diagram 1: Illustrative example of a Cycle to Work Scheme submarket

Diagram 1 illustrates how groups of employees may go through their employer to access a scheme provider, where the scheme provider will then allow them access to a large range of bicycle retailers. Instead, if they were to not use the Cycle to Work Scheme, the employees would go directly to the large range of retailers, without first passing through their employer and their employer’s chosen scheme provider.

To use the scheme, employees must go through their employer, who may offer access only through a scheme provider, who in turn offers access to retailers. This creates a new path in which consumers reach retailers, and effectively results in the creation of new submarkets.

In the best-case scenario, these submarkets will reflect the wider monopolistic bicycle retail market at a whole, as is depicted in Diagram 1. The scheme provider is allowing access to every bicycle retailer, and most likely acting as either an administrative service or platform for all parties.

Employees using the scheme are facing nominally similar market conditions as in the wider bicycle market. The ability to switch between retailers in response to price hiking or product restrictions still exists, and so consumers are more likely to reach the most competitive outcome possible, within the context of the wider bicycle market.

However, scheme providers have the choice of which retailers they will work with. Once a scheme provider has agreed a contract with an employer, they gain a monopoly over how employees access the market. Each scheme provider becomes a new submarket relative to the wider bicycle retail market, and so the conditions within each may differ.

Employees cannot switch between scheme providers in the same way they could switch between retailers in the wider market, unless they are willing to move employers over the issue, which is unrealistic for most. Therefore, their options are what is offered within this submarket, or not using the scheme.

Since the scheme provider decides which retailers they offer access to, conditional on their contract with the employer, they control the level of competition within their new submarket, and hence the extent of the power to raise prices.

Therefore, the creation of new submarkets, where scheme providers have more control over the bicycles on offer and their prices, and hence the level of competition, makes room for less competitive outcomes to be sustained in the long run, compared to the wider bicycle market.

Vertical integration to increase market power

Vertical integration is a strategy whereby one company chooses to take on the roles of 2 or more parts of a supply process, instead of using external suppliers.

In the context of Cycle to Work, this means one company is both the scheme provider, and the retailer of the bicycles, instead of these separate responsibilities being carried out by separate parties. This can be seen in Diagram 2.

Diagram 2: Illustrative example of the Cycle to Work Scheme market

Diagram 2 illustrates how groups of employees may go through their employer to access a scheme provider, where the scheme provider will then allow them access to one bicycle retailer only. Instead, if they were to not use the Cycle to Work Scheme, the employees would go directly to the large range of retailers.

By virtue of employers outsourcing their administration to only one scheme provider (as opposed to using several), this provider has a monopoly over the employees. Vertical integration allows the retailer to gain this beneficial position held by the scheme provider.

Bicycles from the wider and more competitive market, and from the scheme provider/retailer, are strong substitutes. A consumer is likely to be willing to switch between the wider market and the vertically integrated retailer, dependent mainly on price and product choices.

For employees working for an employer who has opted to use the vertically integrated scheme provider, they are given a tax relief subsidy in this submarket, and no change in purchasing power in the open market. If they are interested in purchasing a bicycle, they will choose to substitute towards the subsidised market. Consumers derive a benefit from the goods being both cheaper than they were before, and relatively cheaper than the alternatives available.

Vertical integration therefore enables retailers to gain a share of the wider bicycle market by becoming a monopolist in the market where consumers have increased purchasing power. Without vertical integration, the scheme provider would have many more retailers for employees to choose from, introducing competition for sales. Instead, the retailer’s integrated relationship with the scheme provider means there is only one retailer employees can use their tax relief discount with.

Vertical integration can have other benefits for the retailer in addition to the diversion of sales towards their own retailer. Higher volumes of sales may reduce average costs of production through economies of scale, allowing for higher profit margins on the bicycles sold. The retailer and scheme merging to become vertically integrated also saves both parties time and money in negotiating agreements and paying any fees.

Incentives for employers

Employers may wish to provide the scheme due to an interest in employee wellbeing, or to offer what is viewed as a competitive remuneration package and therefore to aid recruitment and retention. However, there is an additional administrative burden created by the scheme, and so an employer’s priorities will likely be outsourcing to a reputable company that will remove this burden at no cost.

In addition, the scheme offers a NICs saving to employers. This could provide an incentive to increase the total value of bicycles loaned through the scheme, as in the short run this will align with increasing their employer NICs relief and minimising their tax bill.

Ipsos’s evaluation found employers who offer the scheme quoted reasons such as wellbeing, recruitment and ease of administering, but the NICs saving wasn’t mentioned as a direct reason for offering the scheme. This suggests lack of knowledge and desire to outsource the admin burden are the key drivers in employers’ choice of scheme provider.

This creates an environment where employers lack the knowledge and incentive to ensure their employees maximise value for money and choice. Crucially, this result follows from the nature of the scheme design, as an employer provided benefit in kind that creates an admin burden for employers.

4. Inferences and conclusions

This evaluation has assessed the success of The Cycle to Work Scheme, against incentivising the following outcomes:

• the full benefit of the tax relief being passed on through lower prices

• the full choice of products available such that optimum decisions are not distorted

• an increase in bicycle provision amongst those who did not previously cycle to work

4.1 The full tax relief savings being passed through

There is an incentive for employers to outsource the administrative burden of providing the scheme to an external provider, creating a monopoly over the channel in which employees can access the scheme. This creates an environment for a monopoly sub-market, where direct price hiking is more likely to be possible.

4.2 The full choice of products available

The incentives for employers to use scheme providers generates a further incentive for retailers to vertically integrate, meaning consumers will only have access to a limited share of bicycles and accessories when using the scheme. Further, a less competitive sub-market may allow retailers to directly reduce their product ranges to direct sales towards more profitable products.

This would be directly bad for choice relative to a scheme that allowed open access to all retailers, would distort optimum decision making, and could act to increase the price of purchases if consumers have to substitute to a more expensive product than they would have done in the wider market.

4.3 An increase in bicycle purchases and users

The possibility of direct price hiking, direct product restriction, vertical integration and monopoly scheme providers suggests lower effectiveness of the scheme at increasing bicycle sales compared to other designs. This is likely to be especially true amongst prospective new cyclists.

4.4 Sustainability of suboptimal outcomes

In an open market, the suboptimal outcomes described above would not be sustained in the long run.

The administration burden of the scheme encourages the use of a single scheme provider by employers which immediately creates a new and more captive submarket of employees. Secondly, the scheme design lacks sufficient incentive for employers to ensure value for money when selecting the scheme provider. Both of these design features suggest employers underscreening scheme providers.

This may sustain an environment suitable for monopoly contracts, a highly concentrated secondary market, and less competitive outcomes for consumers.

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1. Evaluation of the Cycle to Work Scheme - GOV.UK ↩

2. As a result of both higher prices and people on higher incomes receiving a higher marginal rate of tax relief ↩

3. Evaluation of the Cycle to Work Scheme - GOV.UK (publishing.service.gov.uk) ↩

4. Housing subsidies and property prices: Evidence from England - ScienceDirect ↩

5. The Long-Term Impact of Housing Subsidies on the Rental Sector: the French Example ↩

6. Note that even a credible threat of entry is sufficient to maintain more competitive outcomes, even if these threats do not materialise. ↩