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Waiving or drowning? Tax rules on giving up pay

Q. What's worse than being bullied by the tabloid press into waiving a bonus?
A. Being bullied into waiving a bonus and still having to pay tax on it

Anyone may waive remuneration, or even give back remuneration after they've received it: but it's an entirely different matter as to whether they remain taxable on the remuneration foregone.

As always, timing is absolutely crucial. If remuneration is given up before it is treated as received for employment income purposes then it will not be included in taxable earnings. But (and here's the rub) if it's given up after it is treated as received for employment income purposes then the employee or director remains taxable on it despite the waiver. And, crucially, "received" doesn't mean anything as simple as "paid into the recipient's bank account", particularly for directors and particularly for bonuses.

Recent publicity has of course focussed on executives of public companies: but exactly the same rules apply to a retrospective adjustment of remuneration in a private company: you can only give up earnings tax-efficiently if you haven't already "received" them.  So when is remuneration "received"?

The statutory rule (broadly) is that earnings are "received" at the earlier of

• when a payment of earnings is actually physically made or
• when the employee becomes absolutely entitled to payment

For directors there are three other possibilities, namely

• when earnings are credited to the director’s account in the company's records
• where the amount of the earnings is determined before the end of the period to which they relate, the date the period ends
• where the amount of the earnings is determined after the end of the period to which they relate, the time when the amount is determined

All of this makes directors' bonuses especially tricky, as the date of entitlement is likely to be contractual, by reference either to a particular date or to a contingency, such as the finalisation of the employer's accounts; which in many cases will fall long before the actual date of payment.

So: before you agree to give up what you've earned, best check the tax position. If in doubt, call us to discuss.