With the ongoing pandemic, many employees and directors have made some tough choices in respect of their remuneration with many deferring or potentially waiving some or all of their package.

Waiving is simple to implement and results in you being taxed on what you are paid.  Provided you have irretrievably given up your rights to the remuneration prior to the payment date, i.e. if your contract states you are to be paid on the 28^th of each month and the reduction is agreed before the 27^th of that month, the waiver will be effective for tax purposes.

However, employer’s must remember that the payment of a salary, and therefore the tax point for PAYE etc, is the earlier of,

• When the money is electronically or physically transferred; or
• The point at which the employee becomes entitled to ask for the payment to be made.

This means that a deferment needs to give a future date at which the deferred salary will be made available for drawing by the employee e.g. 6 April 2021, which will then become the tax point for the deferred salary.  Otherwise, the employee is in danger of the salary being taxed at the normal point in the wages cycle and being “available” to be drawn from a loan account with the company.  What has in effect happened is that the salary has been paid to the employee but immediately loaned back to the company.

The above situation will apply equally to a director but directors do often have more flexibility with companies on the timing of their remuneration, so there are additional rules that apply only to directors where salary is taxable on the first to occur of the following: –

• The point at which earnings are credited to the director’s loan account; or
• If earnings for a period are determined by the end of an accounting period, then the end date of that period; or
• If earnings for an accounting period are not determined until after the end of that period, then the date at which the remuneration is determined.

Wherever a waiver or deferment is agreed, this should be formally documented.

The above  assumes that the employee or director is waiving or deferring part of their remuneration for no other recompense; if they are in receipt of some other benefit in exchange for the sacrifice, then special rules will need to be applied.

If this is of interest to you or your business, contact your relationship partner to find out how we can assist you.