22 May 2020
HMRC has this week published guidance regarding its approach to employees waiving entitlement to income.
The guidance is a summary of the existing law and it does not offer any explicit additional concessions in HMRC’s approach. HMRC say they are keen to support people who choose to waive - or give up – part of their income to support their employer or to make a charitable donation. The support is so far limited to this guidance to ensure these people understand the tax implications of waiving their income. The “new” guidance is summarised below.
Waiving salaries or bonuses
If an employee and their employer agree to reduce the employee’s entitlement to any salary or bonus and receives nothing in return, then no tax or NICs will be due on the amount given up, provided that the agreement to reduce the salary/bonus is entered into before the payment was due to be paid.
If instead the bonus is waived after it has become due, or if salary is returned to the business after it has been paid, the waived amount will still be subject to income tax and NICs.
However, HMRC re-stated that it is not possible to claim back income tax and NICs that would already have been deducted from the salary or bonuses on payment.
If a shareholder waives their right to receive a dividend, then no income tax will be due on the amount given up, provided that a formal deed of waiver is executed and witnessed before the shareholder becomes entitled to receive the dividend (that is, before the dividend is formally declared and approved by the company).
In this guidance, HMRC also re-stated the tax treatment of making donations to charity via:
- payroll giving arrangements, in which case the donation is not subject to income tax but is still subject to NICs; or
- using gift aid, in which case the donation is made out of post-tax salary, but the payment will be eligible for income tax relief.
The pressures of Covid-19 have meant that many businesses have already implemented some form of salary/bonus reduction, or may be considering this action. This publication provides welcome guidance regarding the current tax position of such waivers, but disappointingly does not offer any additional exemptions or concessions in situations where the waivers take place after the strict deadlines for tax to arise. It also does not offer any relaxation of rules relating to recovery of income tax and NICs after they have been paid. It does at least indicate a more positive approach by HMRC to salary and bonus waivers generally, and it is interesting to note that HMRC specifically requires the use of a deed for dividend waivers, but makes no such explicit reference for salary and bonus waivers in this guidance.
The guidance is also high level and the devil, as ever, is in the detail. The rules regarding the date on which an individual becomes entitled to an amount of employment income can be complicated, particularly in the case of directors. In addition, these rules apply only where the salary is waived and the employee receives nothing in compensation for that reduction. If the employee receives other benefits (e.g. non-cash benefits or increased holiday allowance) or if the employee agrees that the payment should be diverted to a different cause (e.g. a charity) rather than being waived, then the treatment set out above may apply differently.
If your business is considering taking this course of action we recommend that advice is taken prior to implementation. HMRC (so far) are not offering any new concessions to waiving salary or bonuses and a general statement of “support” offers little practical reassurance. It’s really important that businesses ensure they are compliant with the income entitlement and payment timing rules to avoid unexpected tax and NICs charges.
If we can support you with any of the points in this alert, please do contact us.
Sarah Bruce and Chris Fallon