Cycle to Gold & Save Tax!
Newsletter issue - September 08.
Inspired by the efforts of Team GB's cycling squad at the recent Beijing Olympics? Then why not implement a Cycle to Work scheme and award yourself a gold medal for achieving tax savings for both you and your employees. How is this possible?
Let's say, Mark, under his employer's scheme, chooses to have the loan of a road bike retailing at £499. His employer buys the bike and reclaims the VAT on the purchase - reducing the cost of the bike immediately to £425 (£499 x 100/117.5). By Mark agreeing to a salary sacrifice, his gross pay is reduced by £23.61 per month over say 18 months to meet this net amount. However, the monthly net cost to Mark will only be £16.29 (£23.61 x 69%) because he saves income tax (at 20%) and NI (at 11%) on what would have been his gross pay.
At the end of the 18 month agreement period Mark's employer offers the ex-loan bike for sale at a fair market price which will be substantially reduced from the new price, perhaps just £40. The cost to Mark is: net salary given up £16.29 x 18 months = £293.22 plus the cost to buy the bike at end of the period = £40 .Total cost £333.22 or 67% of the price the employee would have to pay outside such a scheme. As well as saving employers NI on the salary sacrificed Mark's employer can include the cost of the bike within their new Annual Investment Allowance claim, and obtain a 100% write off in the first year against Tax.
This is just an example. There are various ways the tax savings could be structured between employee and employer but you get the idea!
The Cycle to Work exemption removes the tax charge (and need for a P11D entry) on a benefit-in-kind that would otherwise apply to cycles and cyclists safety equipment loaned to employees. The key conditions, other than those for any salary sacrifice scheme, are that:
- ownership of the equipment must not be transferred to the employee during the loan period;
- employees must use the equipment mainly (say 50%) for qualifying journeys; i.e. between the home and workplace, or part of (for example, to the station), or between one workplace and another ; and
- the Cycle to Work scheme must be made available generally to employees of the employer concerned and not confined to directors or offered to them on more favourable terms. This scheme can be used by one person companies but not the self-employed.
Employees are not expected to keep mileage logs but you should make it clear to them that if they do not use the cycle mainly for qualifying journeys, they may lose the benefit of the tax exemption. Finally, you do not need approval from HMRC to set up or run such a scheme.