It has become the latest trend in executive pay in the UK – senior executives waiving part of salary and/or making donations to charities or local businesses. In the midst of the COVID-19 pandemic, executives are to be commended for leading by example and wanting to help support their companies and the communities in which they operate. But for some executives and their employers, the well-intentioned actions have come with unexpected tax consequences.
Salary and bonus waivers are notoriously fiddly to get right – particularly where they are coupled (even indirectly) with a charitable donation. This is because the right to the salary/bonus has to be given up entirely. And where there is an understanding that any waived amounts would be used by the employer for charitable purposes, HMRC takes the view that the executive still has a right to the salary and so should be taxed on it. Where the proposal is to contribute to local businesses, the tax position gets even more difficult as those businesses are also potentially taxable on the monies they receive.
There has been a lot of coverage on this issue – largely because it has seemed illogical to many that 'doing the right thing' should result in a tax bill in this way and many questioning whether this really was the right tax position. But HMRC yesterday confirmed their position on this issue in a short but clear statement. So 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.