A question of timing
Strange as it may seem there are times when an employee may choose to give up the right to remuneration and get nothing in return. This is known as a waiver of remuneration. This is very different to a salary sacrifice arrangement where an employee gives up cash remuneration but receives a non-cash benefit instead, often to take advantage of a tax and National Insurance exemption attached to the benefit.
A waiver of remuneration may be made in relation to salary or wages, fees, bonuses or in respect of any form of cash remuneration.
Strange as it may seem, there can be tax implications of receiving nothing! It all comes down to timing.
If the remuneration is waived before it is treated as having been received for income tax purposes, the amount waived is not treated as taxable remuneration and there is no tax to pay. So far so good.
However, if the remuneration is not waived until after it has been treated as received for tax purposes, the employee is taxed on the income given up. In this scenario the employee is in the same position taxwise as if he had been paid the remuneration in that PAYE is due and the waived remuneration is treated as part of his or her taxable earnings. The logic for this is that the remuneration is treated as having been paid to the employee who then chooses to use it in a particular manner, i.e by giving it back to the employer.
This is clearly not a good result. Not only does the employee not receive the benefit of the remuneration, he gets a tax bill too! Timing is therefore everything to ensure that a tax liability does not arise in relation to remuneration foregone.
James is a senior employee who is paid a salary of £120,000 a year. He is paid monthly and his gross salary is £10,000 per month.
The employer suffers cash flow problems and is unable to make the payment due on 31 December.
In mid-January the employee agrees to waive his salary for December and January. The cash flow position improves and the employee is paid is February and March payment on time.
The December payment is treated as paid for tax purposes. The employee was entitled to it on 31 December. The waiver did not happen until after that date. Despite the fact the employee gave it up, he is taxed as if he had received it and then given it back.
However, the January payment (due on 31 January) was waived before the employee was entitled to receive it. Consequently the waiver is effective as regards the January payment and no tax is due. The January payment does not form part of the employee’s taxable remuneration for the year.
For the tax year in question, the employee is treated as having received taxable remuneration of £110,000. This is made up of ten months at £10,000 actually paid plus the £10,000 for December waived after the employee became entitled to it.
Similar rules apply in relation to waivers of bonuses. As with salary, the bonus must be waived before the employee is entitled to it to prevent a tax liability arising.
Julie’s employer prepares accounts to 31 March each year. Staff are awarded bonus depending on the results. The bonus is announced on 30 September and is payable on 31 December.
Julie is told in September that she will receive a bonus of £5,000. However, in October the company loses a major contract and runs into financial difficulties. Employees are asked to give up their bonuses to help the company stay afloat. In November, Julie agrees to waive her bonus. As the bonus is waived before 31 December, the date on which she would have been entitled to receive it, there are no tax consequences. It is as if the bonus didn’t exist.
Getting the timing right is more complicated in relation to directors as there are special rules that dictate when remuneration is treated as received. These are set out in HMRC booklet CWG2 (see www.hmr.gov.uk/guidance/cwg2.pdf).
Practical Tip :
Ensure remuneration is waived before entitlement to the payment arises, otherwise a tax liability could arise on the amount waived.