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Beware of the tax bite on waiving salary and dividends

‌As businesses continue to feel the economic impact of COVID-19, some senior employees and shareholders of businesses need to beware of potential tax traps when offering to waive their agreed salary and dividends to help cashflow. 

Last updated: 1 September 2020

The key issues to determine liability to income tax and national insurance contributions are: the date the individual has the right to receive their income, and whether they are receiving salary or dividends. We explain each of these potential issues when offering to waive salary and/or dividends.

Salary

If an employee agrees to waive their salary before they’re paid, no income tax or national insurance contributions will be deducted. However, if the salary is waived after it’s paid by the employer (for example, the salary is paid and then given back to the employer by the employee), 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 the employee doesn’t receive the remuneration. 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 tax liability, the shareholder must waive their 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, this 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 the shareholder. If this isn’t completed, the shareholder will still be liable to tax at the applicable income tax band for dividends. 

Payroll Giving

Some generous employees have increased their level of Payroll Giving during COVID-19, and HMRC have 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.

About the author

David Conway

+44 (0)207 710 0363
conwayd@buzzacott.co.uk

Last updated: 1 September 2020

The key issues to determine liability to income tax and national insurance contributions are: the date the individual has the right to receive their income, and whether they are receiving salary or dividends. We explain each of these potential issues when offering to waive salary and/or dividends.

Salary

If an employee agrees to waive their salary before they’re paid, no income tax or national insurance contributions will be deducted. However, if the salary is waived after it’s paid by the employer (for example, the salary is paid and then given back to the employer by the employee), 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 the employee doesn’t receive the remuneration. 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 tax liability, the shareholder must waive their 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, this 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 the shareholder. If this isn’t completed, the shareholder will still be liable to tax at the applicable income tax band for dividends. 

Payroll Giving

Some generous employees have increased their level of Payroll Giving during COVID-19, and HMRC have 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.

Speak to an expert
Speak to an expert 

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. 

Looking for more information? If you have a query about any of the topics mentioned in this article, please fill in the form below and one of our experts will be in touch.

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