As a senior employee or shareholder of a business, there may be times you wish to consider waiving your agreed salary or dividends to support business cashflow. However, before agreeing to do so, beware of these potential tax traps.

The key issues that determine your liability to income tax and national insurance contributions are the date you have the right to receive your income, and whether you are receiving salary or dividends. Below, we’ve explained each of these potential issues when offering to waive salary/dividends.

Salary

If you agree to waive your salary before it’s paid, no income tax or national insurance contributions will be deducted. However, if the salary is waived after it’s paid by your employer (for example, the salary is paid and you give it back), the full amount of income tax and national insurance remains due.

Similarly, if the salary is waived on the due date, tax will still be payable, even if you don’t receive it. It’s crucial records are kept to show the agreement made between you and your employer, as well as the date the agreement took place.

Dividends

To avoid a tax liability, you must waive your right to the dividends before the right to receive it occurs. For final dividends, this date is before they are declared and approved; for interim dividends, it is before the dividend is paid.

In order to waive the right to the dividend income, a Deed of Waiver must be formally implemented, dated and signed by you as the shareholder. If this isn’t completed, you will still be liable to tax at the applicable income tax band for dividends.

Payroll Giving

Some generous employees increased their level of Payroll Giving during COVID-19, and this practise has continued in many cases. HMRC has noted that employees are still able to make charitable donations. As an employee, you’ll just need to inform your employer of the UK or EU registered charity you would like to donate your wage to. While no income tax will be deducted from the donation, national insurance contributions still need to be made.

What should you do?

If you're a senior employee or shareholder and are considering waiving your salary and dividends, it’s crucial you do so properly with all the correct documentation. With HMRC already considering the adverse tax effects of not doing so, the result could be costly if not carried out correctly.