Beware the tax implications of waiving remuneration and repaying bonuses

As a result of the current Coronavirus crisis, many senior employees and directors are trying to “do the right thing” by the businesses they lead, but waiving their own salary or bonus payments could, if not handled correctly, see them being held liable for tax on earnings they don’t receive.

A waiver of remuneration, including salary and bonus payments, happens when an employee or director gives up rights to remuneration and gets nothing in return. The tax consequences of a waiver depend on its timing:

  • If the remuneration waived is given up before it is treated as received for tax purposes, then it will not be taxable earnings; but
  • If the remuneration waived is given up after it is treated as received for tax purposes, then the director/employee remains taxable on the amount given up.

In effect, it is not possible to waive entitlement to remuneration already earned without still being liable for income tax and national insurance under PAYE. 

Whilst it is admirable that business leaders are taking such action, the tax risk of getting it wrong is very real and we would encourage anyone thinking of waiving remuneration to speak with us in advance because, in some cases, it can be difficult to determine when remuneration is treated as received for tax purposes, particularly for directors.

Along a similar vein, a voluntary repayment of a director’s or employee’s bonus to help maintain liquidity during the crisis is unlikely to attract any reduction in their tax liability, so this will require careful consideration, perhaps with the individual making a loan back to the business instead.

HMRC is being pressed to offer some relaxation on their strict interpretation of the relevant legislation so that senior employees and directors can bolster the businesses they lead without the negative tax risk.  We will keep you informed, but please speak with us if you are contemplating the waiver of remuneration or the repayment of a bonus.

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