Could you face a tax bill for giving up bonuses and dividends during the pandemic?

Salary sacrifice rules mean that tax already paid on any salary or bonus handed back to the employer, cannot be reclaimed.

If written agreements about waiving payments, including dividends, are not written up in formal documents ahead of time, income tax and National Insurance will still apply, resulting in duties being paid on earnings that are never received.

For the highest earners, this could mean paying 45% tax on a bonus you have already turned down. For senior employees and officers in professional positions that have announced they will waive part or even all of their salary at this present time, this could be quite significant.

Therefore, HM Revenue & Customs, professional bodies and accountancy firms have been flagging this area to taxpayers, highlighting that the tax rules may not be as generous as the individuals trying to help their employers’ cash flow.

When other temporary exemptions and changes to the rules have been made during the current crisis, many are hopeful the rules would be relaxed in this area too, however no changes have yet been made. 

The Chartered Institute of Accountants, a trade body, previously called for the rules to be relaxed at a time when many small businesses, which may not have in-house accounting expertise, were doing everything they could to shore up cash flow.

For directors or other shareholders of a business, including employees, they are able to waive their right to be paid a dividend, but a “Deed of Waiver” must be formally executed, dated and signed by shareholders and witnessed and returned to the company. The waiver must be in place before the right to receive a dividend arises. 

Bonuses must be waived before the date they are due to be paid. If they are waived on or after the due date then tax will still be payable on them, even if the bonus is not paid.

In addition, donating part of a salary should be done through payroll giving in order to avoid paying needless tax, while those making direct contributions are encouraged to make use of Gift Aid, which allows charities to claim an extra 25p for every £1 donated.