Coronavirus: The Tax Impact Of Waiving Remuneration In The UK

• Published date: 09 June 2020
• Author: Ms Natasha Oakshett
• Subject Matter: Employment and HR, Tax, Coronavirus (COVID-19), Contract of Employment, Employee Benefits & Compensation, Income Tax, Financing, Operational Impacts and Strategy
• Law Firm: Withers LLP

To really demonstrate that "we are all in this together", a number of senior employees and officers in professional positions have announced that they will waive part, or even all, of their salaries at the present time. However, notwithstanding the spontaneity of such a response, the good deed will need to be tempered by careful planning, otherwise both employee and their employer could suffer a tax bill.

Timing is key to avoiding an unwanted tax bill in connection with a waiver of salary. That is because the general rule is that if a waiver of salary happens after the earnings are treated as having been received, the employee remains liable to income tax and NICs on the amount waived. Accordingly, the employer is liable to NICs and must operate PAYE in the usual way. So, the wavier may be valid, but the tax liability still accrues, and HMRC would be able to pursue employer and employee for unpaid amounts.

To avoid this, it is vital that any waiver is formalised before the salary is treated as received. HMRC's guidance says

"If an employee and employer agree to a reduction in the employee's remuneration before they are paid, eg to support company cashflow during the pandemic, then no Income Tax or National Insurance contributions (NICs) will be due on the amount given up. This is provided the agreement is not part of any wider arrangement to divert the amount to a particular recipient or a cause."

So, when are earnings treated as received? For an employee, earnings are received on the earlier of (i) when a payment of earnings is actually made or when a payment on account of earnings is made, or (ii) the time when a person becomes entitled to payment or earnings or a payment on account of earnings.

But, for directors the rules are more nuanced with the somewhat counterintuitive result, in some cases, of bringing forward the "tax point" to a time when that director is not actually be able access the earnings. This could catch out owner-managers of businesses.

Having ascertained the right timing, how is a waiver formalised? A waiver of remuneration happens when an employee gives up rights to remuneration and gets nothing in return. This should be formalised in a deed of waiver or a contract variation (consistent with any variation provisions in the contract of employment). An employee or director will usually want to secure clarity in that agreement about exactly what is to be waived (and for how long), as well as confirmation that the other terms and...