HOW DO EMPLOYEES GET A TAX-FREE BIKE FOR WORK?
Step 1. Once an employer is partnered with Cyclescheme all employees wishing to participate visit our shop to choose the bike and, if required, safety equipment.
Step 2. Employees then apply for a Cyclescheme Certificate online using a unique link to our secure Extranet facility. The unique link is provided to employers and distributed to all employees. The employee will usually sign an online Hire Agreement at this time.
Step 3. If the employer approves their application they will countersign the Hire Agreement and pay Cyclescheme for the full retail price of the bike and equipment.
Step 4. Cyclescheme will then post out a paper Certificate, usually to employee’s home address.
Step 5. The Certificate is then redeemed at our shop and exchanged for the bike package. Salary sacrifice then commences over the hire period (usually 12 months). The salary sacrifice is made prior to Income Tax and National Insurance contributions and, as a result, employees pay less of both.
Step 6. At the end of the hire period the owner of the equipment may choose to offer the employee ownership of the bike for a market value payment, or the employee may pay a small deposit allowing them to remain in possession of the bike and continue to use it.
Please note that the above procedure applies to the vast majority of schemes, but there are some variations to the above. This variation depends on how the employer’s scheme is set up, i.e., the employer may use a finance company to fund the scheme (see below) or a benefits provider.
WHO CAN PARTICIPATE IN THE SCHEME?
Any size employer from any sector can partner with Cyclescheme. Eligible employees must receive salary via the PAYE system, and earnings should be more than the National Minimum Wage after salary sacrifice. Employers who pay staff close to the National Minimum Wage should contact Cyclescheme to discuss the range of attractive options available that allow lower paid employees to participate in, and benefit from the scheme. There is no credit check for employees wishing to participate, and Under 18s can join the scheme if their guardian signs a guarantor agreement.
WHAT IS SALARY SACRIFICE AND HOW DO PARTICIPANTS SAVE?
Salary sacrifice occurs when an employee agrees to give up part of their salary for an agreed period (in the case of the Cycle to Work scheme this is usually 12 months) in exchange for a non-cash benefit, such as the loan of a bicycle and safety equipment. As salary sacrifice is taken from the gross salary (before tax) rather than net pay it means the employee pays less income tax and National Insurance.
Figuring out how Salary Sacrifice Arrangements work can be confusing, particularly when participants can only see the gross salary sacrifice amount on their hire agreement. So where’s the saving? Here’s a guide to how it all works.
HOW DO PARTICIPANTS SAVE?
The key to understanding the way participants save money on a salary sacrifice arrangement is in understanding how they pay tax.
Cycle to Work scheme participants can potentially save on 2 forms of tax; Income Tax & Employees’ National Insurance Contributions (NICs).
Income Tax and Employees’ National Insurance Contributions (NICs) are expressed as a percentage and applied to participants’ gross salary amounts. The tax deductions are then made and what the participant gets in their pocket is NET salary.
This is the clever bit; by reducing their gross salary they reduce the amount the income tax and NICs are calculated on, hence participants pay less of both.
Here’s an example of how the savings work during the hire period, assuming the following:
- Employee is paid monthly
- Employee is a standard rate tax payer requesting a £500 Certificate
- The hire period is 12 months
- The Employee’s monthly gross salary is £1,200.00 (£14.400 per annum)
scheme participationSalary during
Monthly Gross Salary£1,200.00
Bike value including VAT
Gross salary sacrifice total £500.00
MONTHLY GROSS SALARY SACRIFICE = £500 / 12 months
(this amount appears on the hire agreement) £41.66
Monthly Gross Salary after salary sacrifice
Monthly NIC contribution (12%)
Monthly income tax contribution (20%)
Net Salary £1,200.00
MONTHLY NET SALARY REDUCTION£816.00 minus £787.67=£28.33
MONTHLY SAVING£41.66 minus £28.33 =£13.33
So, because the participants pay less income tax and NIC their NET salary reduction is less than the GROSS salary reduction, and this is how savings are achieved. In this example, the employee makes a £41.66 contribution to the employer, but it only costs them £28.33, resulting in a saving of £13.33 per month.
WHAT ARE THE SAVINGS FOR THE EMPLOYEE AND EMPLOYER?
Typical savings for employees are between 32% for basic rate taxpayers and 42% for high rate taxpayers, but the actual amount depends on the employee’s personal tax band and the way the employer runs their scheme. If the employer uses external finance (i.e. borrows the money to buy the bikes from an outside agent) then savings will be approximately 5% lower.
Employers can typically save 13.8% of the total value of salary sacrifice, due to reductions in Employers’ National Insurance Contributions (NICs) due.