The Green Transportation Solution

Imagine if you could go to a bike shop, purchase a £800 bike and £200 worth of cycling gear and only pay £500 that is amortized over 12 months through a salary sacrifice arrangement with your employer.  Sound interesting?  Well, they are doing it in the U.K. with a government sponsored program called “Cycle to Work Scheme. “ The program has resulted in boosted ridership, increased bike shop sales, and the creation of one of the fastest growing industries in the U.K.

As one solution to the omni-present carbon producing transportation paradigm that the world faces today, the U.K. decided to take action and give employers a tax break for paying for 50% (up to £1000) of employees purchasing a bicycle and commuting gear.  The bicycle is to be used for commuting to work, but to this day there are no guidelines as to the number of days that an employee should commute to work. 

Benefits

Employers benefit from more physically fit, punctual and motivated employees.  Employees benefit from better health and better equipment because their money goes further.  Additionally, both employees and employers receive benefits in the way of tax savings.

About the Program

Under the UK government’s Green Transport Plan, the 1999 Finance Act enabled employers to loan employees cycles and cycling safety gear.  In 2005 the program was branded as the “Cycle to Work Scheme.”  Under the scheme, employers can purchase cycles and cycle protective gear and loan the gear to employees.  It is understood that if an organization chooses to participate in the program, all employees of that organization should have access to the program. 

When a cycle or cycling protective gear is purchased under the scheme, a tax exemption of these items applies to gear that is loaned out to employees.  For instance, if an employer purchases a cycle retailing at £450, that employer can reclaim the VAT, thus reducing the cost to £383.  Employers need to maintain ownership of the gear during the agreed term of the loan.  Participating employees can choose to pay for the gear over the term of the loan through a salary sacrifice arrangement with their employer.

Under the salary sacrifice arrangement, the employee agrees to accept a lower income in return for ownership of the cycle and cycling gear.  The gear is purchased from the employer over the loan term as a tax-free benefit and the employer will be responsible for up to £500 of the retail purchase of the gear.  The salary sacrifice reduces the gross income of an employee therefore reducing the tax that employee owes.  Likewise, with a reduced gross income payout, the employer saves on NIC’s owed for that employee.  Additionally, the employer can claim the gear as capital expenditures and deduct the gear at the end of the year.