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Waiving the right to income

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HMRC has published new guidance for individuals who decide to give up part of their income in order to support their business or employer, or who simply want to donate to charity during the coronavirus pandemic.

The guidance notes that some methods of waiving income are more effective than others from a tax perspective. For example, a straightforward ‘waiver of remuneration’ where an employee gives up the right to remuneration, effectively agreeing to a reduction in their salary before it is paid, will result in no income tax or NICs due on the amount given up (any salary or bonuses must be waived before the date they are due to be paid). This is contingent on the agreement not forming part of an arrangement to divert the amount to a particular recipient or cause, such as a charity.

Directors and employees who are shareholders might consider giving up their dividends, in order to support the company. To be effective for tax purposes, a formally executed and witnessed dividend waiver must be in place before the right to receive the dividend arises.

Where employees want to donate to charities, employers should consider setting up a payroll giving scheme. Alternatively, individuals can of course make donations to charities via gift aid (reclaiming the difference between their top rate of income tax and the basic rate).

Law firm Freshfields Bruckhaus Deringer commented: ‘the message is clear: for those who want to be sure that they are contributing in the most tax-efficient manner, it is payroll giving or gift aid only’.

Issue: 1488
Categories: News