| Explanation
and Savings made using Pedal2Work |
| 1. Under his
employer's Pedal2Work scheme, David chooses to have the loan of a
bike and accessories retailing at £600 - (£500 bike, £30
helmet and £70 of safety related accessories) |
| 2. His employer
reclaims the VAT - reducing the cost to £515.11 |
| 3. This net amount
is met by David agreeing to a salary sacrifice whereby his gross pay
is reduced by £42.93 per month over 12 months |
| 4. The monthly
net cost to David will be £28.76 because he doesn't pay tax
or national insurance on the gross pay (£42.93) that he has
sacrificed |
| 5. At the end
of the 12 month period David's employer offers the ex-loan bike for
sale at a fair market price, typically 5% of the original value +VAT.
e.g. £35.25 |
6. The cost to
David is:
- Net salary given up £28.76 x 12 months = £345.12
- Cost to buy the bike at end of the period = £35.25
- Total cost to David (63% of retail price) = £380.37 |
| |
| Total
saving to David: £ 219.63 - 37%! |
| 'Fair market
price' is usually five percent of the original package price. So,
after a 12 month 'loan' for a bike package costing £600, the
employee takes full ownership for just thirty five pounds. This is
as yet untested by HMRC. |
| The actual discount
available to an employee will be based upon their own personal tax
circumstances (higher tax payers get higher discounts) and whether
their employer can recover all VAT. Some public sector employers,
charities and some others may not be able to recover all the VAT. |
| In rare cases,
where employers decide to directly bear all scheme costs themselves,
employees need no budgets at all, with the full cost of their loan
bikes then legally treated as 'non cash tax free benefits'. |
