Important Implications of remuneration waivers

In the spirit of “we’re all in this together” we have seen some support given by a number of senior employees and directors who are not able to be furloughed but have or are considering waiving some or all of their salary or bonuses.  There are however important tax rules around this however and care can be required so that HMRC are not in a position to seek tax and NICs on the waived salary or bonus.

HMRC has a clear view on the tax treatment of waivers of remuneration when an employee gives up rights to remuneration and gets nothing in return.

Timing is key.

What is important is that the salary or bonus is given up before tax rules treat it as received.  This is because remuneration cannot be given up after it has already been earned without it still being subject to PAYE in the normal way.

An HMRC example  explains this by looking at a situation of an employee on £60k per annum paid monthly on the final day of each month.  The company does not pay the January salary and in February the employee agrees to forgoe his salary from January to March.

In this circumstance, the January salary remains subject to tax even though it has not been received as the agreement was not made until after it had been earned during the month of January.

There is another example given by HMRC which clarifies that where there is an agreement to give up a  non-contractual bonus, this will be effective and PAYE does not arise on the bonus as long as  the entitlement to payment of the bonus arises after the date of the agreement to give it up.

The Chartered Institute of Tax has reported that HMRC has been asked for its view on the tax treatment arising where a director repays a bonus in consequence of COVID-19. For example, where a director has recently received a bonus by reference to last year and would now like to repay the bonus in view of COVID-19 and furloughing to help maintain liquidity and working capital for their employer.

The Institute has confirmed that it has been advised that a voluntary repayment is not considered eligible for relief as negative earnings, and PAYE would still arise on the bonus repaid meaning that the repayment can only be made out of post-tax income.

We hope that HMRC will ultimately adopt a flexible approach here as it has done in other areas, but they are constrained by the legislative position, and whilst a change in legislation is always  possible, with so much going on, we just don’t know if there be the time as well as the will to consider this.

Every situation is different, and the tax analysis will depend on actual facts, so do speak to us if you have any concerns.