19 June 2020

Tax rules on waiving income or donating to a UK charity


HMRC have provided an update on the tax implications of waiving your right to a salary or income in order to support a business or employer during the pandemic, or donating to a charity in response. In order to support people who are opting to give up some of their income, it has suggested legitimate ways in which a waiver of income can be arranged or support given to charities without a tax charge rising.

Supporting a business or employer

For employees, employers and directors who wish to support a business, if they agree to give up rights to remuneration, whether it is salary or a bonus, before it is paid then no Income Tax or National insurance will be due on the amount given up. The decision to give up remuneration cannot be part of an arrangement to divert the money to a particular person or cause however. For example, if an employee decided to give up his bonus on the condition that the money would instead be donated to a particular charity, the bonus would still be liable to tax.

While it is possible to give back a portion of a salary or bonuses to an employer after they have been paid, it is not possible to reclaim the Income Tax or National Insurance contributions deducted when the remuneration was paid. It should be noted that tax will be payable from the date a bonus was due to be paid, even if the bonus has not been paid yet.

Directors and shareholder could also consider waiving their right to be paid a dividend. This requires that the shareholder executes a Deed of Waiver and sends it to the company. A Deed must be in place before the right to receive the dividend arises, which will be before they are declared and approved by shareholders if it is a final divided, or before it is paid for an interim dividend.

The Chartered Institute of Tax has warned that directors and employees should be careful if they intend to waive salaries or bonus payments during the pandemic because of the operation of salary sacrifice legislation. If considering such measures businesses should seek professional advice.

Donating to charity

Payroll Giving allows someone to donate money to charity paid through PAYE from someone’s wages or pension. The donation is taken from an employee’s pay before Income Tax but after National Insurance. Employees can select any charity registered in the UK or EU which is recognised as such by HMRC, and let their employer know. If an employer is not set up with the scheme they can contact an HMRC approved payroll giving agency.

Gift Aid is of course a way to donate tax efficiently after a salary has already been paid.

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