Waiving or donating your income during Covid-19?
The Coronavirus pandemic has not only endangered the health of the UK, but it has also had a huge impact on the economy. This financial strain has led to many people choosing to give up/use some of their income to support: 1) Businesses or employers; or 2) Charities. But what are the tax implications of these acts of generosity?
Supporting a business or an employer
People are showing support for a business or an employer in several ways such as: 1) waiving salary or bonuses before they are paid; 2) waiving dividends; or 3) giving salary or bonuses back to a business or employer after they have been paid. The tax treatment of this support depends on which route is taken (i.e. 1, 2 or 3).
1. Waiving salary or bonuses before they are paid – There is no income tax or National Insurance contributions (NICs) due on the amount forgone provided that the wage surrender is not part of a wider arrangement to divert the amount to a particular recipient or cause.
e.g. HMRC give the example of a person waiving part of their income on the condition that the sum is donation to a particular charity. In this instance, the sum would still be liable to tax.
2. Waiving dividends – Directors and other shareholders (including employees) are able to waive their right to be paid a dividend.
However to effectively waive the right to dividends, a Deed of Waiver must be formally executed, dated, signed, and witnessed before being returned to the company.
In addition, this waiver must be in place before the right to receive a dividend arises. For final dividends this is before they are formally declared and approved by the shareholders. For interim dividends, the waiver must be in place before the dividends are paid.
The tax treatment of waiving the right to dividends is that you will not be subject to any tax on this foregone dividend payment. However, it should be noted that historically HMRC have been known to challenge situations under the Settlements Legislation where the company does not have the funds to pay all of the dividends to all of the shareholders unless dividend entitlement is waived by some shareholders. On the other hand, given the current climate HMRC might be less likely to contest the aforementioned scenario where there is no tax avoidance motive.
3. Giving salary or bonuses back to your business or employer after they have been paid – Some people may choose to give salary or bonuses back to a business or employer after they have been paid. However, HMRC have confirmed that it is not possible to claim back any income tax or NICs deducted from the salary or bonuses on payment.
Therefore, if you are planning on waiving your income or bonus, then it makes sense from a tax perspective to do this before you are paid to avoid paying tax on income you do not receive.
Donating to a Charity
1. Payroll Giving – Payroll giving is a way of donating money to charity without paying tax on it. This is because it must be paid through PAYE from someone’s wage or pension and is taken after National Insurance but before income tax (thus leading to less income tax also being paid).
2. Gift Aid – Donating through Gift Aid means charities and community amateur sports clubs can claim an extra 25p for every £1 donated as the charity can claim back from HMRC the basis tax rate they would have paid on the amount donated.
However, Gift Aid also benefits the individuals that pay above the basic rate, as they can increase their basic and higher rate bands by the amount of the gross contribution. The effect of this is that they can reduce their liability by claiming the difference between the rate they have paid and the basic rate of 20%.
For e.g. :A higher rate taxpayer donated £100 to charity who claim Gift Aid on the donation to make it to £125. The higher rate taxpayer has paid 40% so they can claim back £25 personally (£125 x 20%).
Moreover, for taxpayers that earn over £100,000, (and subsequently would see a reduction in their personal allowance as a result of this) donating through Gift Aid also reduces your income when determining your eligibility for a personal allowance which could have the overall impact of reducing your tax liability.