Salary waivers: Giving it up – properly!

By | 24 August 2021

The Coronavirus pandemic has had a devastating effect on businesses; many struggled to survive severe financial difficulties.

Some family and owner-managed company owners may have waived their salaries (or bonuses) to ease cashflow problems. However, there is a potential trap. If the waiver is not done correctly, an income tax and National Insurance contributions (NICs) liability could still arise, even if the full amount has been waived (this article assumes that the individuals and businesses are UK resident).

Has it been ‘received’?

In May 2020, HMRC published guidance for those choosing to give up income to support their business (‘Check the tax rules on waiving your income or donating to charity’; see

The guidance points out that if an employee and employer agree to a reduction in the employee’s remuneration before they are paid, no income tax or NICs will be due on the amount given up, provided the agreement is not part of any wider arrangement to divert the amount to a particular recipient or cause.

When must it be waived?

By contrast, HMRC warns that bonuses must be waived before they are due to be paid. If they are waived on or after the due date, income tax (and NICs) will still be payable on them, even if the bonus is not paid over.

In fact, HMRC’s guidance is an over-simplification. The tax legislation refers to the ‘payment’ or ‘receipt’ treated as being at the earliest of certain ‘rules’. Broadly, cash earnings are treated as received for tax purposes, and paid for PAYE purposes, on the earliest of the following (ITEPA 2003, ss 18, 686):

  • when a payment of earnings is actually made (or a payment on account of earnings is made for ‘received’ purposes); and
  • when a person becomes entitled to payment (or on account of, for ‘received’ purposes), and in the case of directors only:
  • when earnings are credited in the company’s accounts or records;
  • where the amount of the earnings is determined before the end of the period to which they relate, the date that period ends;
  • where the amount of the earnings is determined after the end of the period to which they relate, the date the amount is determined.

Received/paid or entitled?

HMRC states that a receipt (or a payment for PAYE purposes) includes “crediting an account in the employer’s books on which the employee is free to draw at will” (see HMRC’s Employment Income manual at EIM42270).

Furthermore, in the case of directors any restriction on their ability to draw money from the account is disregarded for these purposes (ITEPA 2003, ss 18(1), 686(1)).

Determining when an employee or director is entitled to be paid is important. For an employee, this will normally be subject to their terms of employment. For directors, entitlement might arise (for example) under the provisions of the company’s Articles of Association (or approved in a company resolution) or a service agreement with the company.

Practical point

A waiver is a gratuitous disposition made for no consideration. A deed should therefore be executed in writing, or possibly a written agreement under which the employer pays a small amount of consideration. Ensure that the document is valid.

The above article was first published in Business Tax Insider (September 2020) (