How does salary sacrifice and the cycle to work scheme work for employers?
Cycle to work operates as a 'salary sacrifice' employee benefit. This means that the employee agrees to give up part of their salary in exchange for a benefit – in this instance the benefit is a bike and/or accessories. The salary sacrifice is taken from their gross salary (before tax) which means that the employee will pay less Income Tax and National Insurance (NI) and that the employer will reduce their National Insurance Contributions (NICs) bill.
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The graphic below shows a comparison between the conventional way of getting a bike (or any commodity) and the tax-efficient way:
As you can see, by going down the salary sacrifice route the amount of income that can be taxed is lowered and thus a significant saving is generated.
An up-to-date overview of rates of tax can be seen on the Government's website. However, to save you opening another tab we can confirm that normal rates of tax are 32% for a lower rate taxpayer and 42% for a higher rate taxpayer. This means that most scheme participants save between 32-42% on the cost of their bike and/or accessories during their initial hire period.
Employer savings relate to employer NICs rates can also be seen on the Government's website. Generally, employers contribute 13.8% to employee NICs and can, therefore, generate up to 13.8% savings on any funds processed via salary sacrifice. For example, for every £1,000 spent on the cycle to work scheme, the average employer will recoup £1,138 - it really is win-win!
It's important to remember that the cost of the commuting package will always show up on employee payslips as the gross (or RRP amount) rather than the net (or 'with-savings') amount. An example of this is shown below:
It's also important to remember that an Ownership Fee will be due at the end of the Hire Period. This is to avoid tax liability and to ensure ownership of the bike is smoothly and effectively transferred from your employer to the employee.
Cyclescheme always recommends that employees choose our 'Own it later' option, as this ensures savings are protected and enables employees to get another bike or accessories package if they wish. As the 'Own it later' option will cost either 3 or 7% of the cycle to work packages original value the total savings will end up being between 25 and 39% depending on the cost of the bike and/or accessories and the rate of tax the employee pays.
How to implement a salary sacrifice:
Because there are some many types of payroll platforms, we do not offer advice on exactly how to apply a salary sacrifice agreement to a member of your workforce.
However, salary sacrifice is ubiquitous in the accounts and payroll world and your finance team, payroll team or financial advisor will be able to organise this for you. It's usually the work of a moment.
Ready to roll? Registering as an employer is free and can be done here.