COVID-19 – tax impact of waiving income or salaries

HMRC have provided us with a brief update regarding the tax implications of waiving income or salaries as a result of COVID-19.

Employers, directors and employees may wish to waive their rights to salaries and bonuses during the COVID-19 pandemic to support their own business, or donate to good causes.

Where directors give up part of their salary or bonus to a third party or direct that the money be used in a particular way, the income foregone is treated as a benefit in kind and a tax charge is created. This is intended to ensure that where income is directed by individuals it remains their earnings.

There are several ways that an employee can legitimately arrange their affairs to give to good causes or support the business without a tax charge arising.

HMRC will shortly issue guidance explaining the existing ways for people to give to good causes or support their businesses, and the tax implications. This is summarised below.

Supporting a Business or Employer

Waiving salary or bonuses before they are paid

If an employee and employer agree to a reduction in the employee’s remuneration before that income is due to be paid, then no Income Tax or National Insurance contributions will be due on the amount given up. This is provided the agreement to waive this income is not part of any wider agreement in which the employer agrees to divert the waived income to a particular recipient or a cause.

Waiving dividends

Directors or other shareholders, including employees, are able to waive their right to be paid a dividend.

For a dividend waiver to be effective, a Deed of Waiver must be formally executed and the waiver must be in place before the right to receive a dividend arises.

Giving salary or bonuses back to a business or employer after they have been paid

It is possible to give back salary or bonuses to a business or employer after they have been paid but it is not possible to claim back the Income Tax and National Insurance contributions that would already have been deducted from the salary or bonuses on payment.

Bonuses must be waived before the date they are due to be paid. If they are waived on or after the due date then tax will still be payable on them, even if the bonus is not paid over.

Donating to Charity

Payroll Giving

Payroll Giving allows an employee to donate money from their wages or pension to charity without paying tax on it. The donation will be taken from employees’ pay before income tax but after National Insurance. Any registered charity in the UK or the EU that is recognised by HMRC for tax purposes can receive donations through payroll giving.

Gift Aid

Gift Aid allows charities to reclaim the basic rate income tax already paid by the donor on any donation to a registered UK charity or community amateur sports club. This means that if you make a donation to an eligible charity the charity can claim back from HMRC the basic rate tax you would have paid on the amount. This is a way of giving to charity tax efficiently even after you have been paid.