Beware tax implications for salary or bonus sacrifice

The pressure on businesses during the Pandemic has led to many business leaders, owners and senior executives taking a reduced salary or sacrificing bonuses.

The action by some may be necessary to ensure the survival of the business and by others seen as a way to help ensure the business remains profitable and ensure job security of their employees.

What are the tax implications of salary or bonus sacrifice?

While this may be honourable in helping to support staff to keep the business afloat during the lockdown, there are implications from a tax perspective.

So, should you fall foul of the rules, you could be hit with an unwanted and unexpected tax bill for both yourself and the company on money never received. Worst still this could be by up to the top rate of 45% income tax on bonuses. 

What are the rules for taking salary or bonus sacrifice?

The rules that were brought in to regulate and reduce tax avoidance, mean that employees are required to make a formal written agreement with their employer to waive their salary.

This needs to be completed a reasonable time before the payment is due to be made, otherwise HM Revenue and Customs will collect the tax and national insurance that was due on the original amount they were entitled to before the sacrifice, rather than what they were actually paid.

Why should company directors and entrepreneurs pay particular attention?

Company directors could be severely hit as their salaries can be determined considerably earlier than their payment, which could mean they are hit with a significant charge if these agreements are not in place.

Entrepreneurs of small businesses may also be particularly vulnerable as they may be fully occupied with the running of their business and may lack the specialist tax knowledge that larger organisations may benefit from. It is highly recommended that these individuals speak to a financial adviser to discuss the best way of dealing with this situation, as other options could be considered. 

The rules in summary

To avoid the unnecessary tax implications from salary sacrifice, the employee and employer need to come to a written and signed agreement that alters the employment contract of the individual sacrificing their salary or bonus, highlighting that the contract allows for a reduced salary or bonus.

This agreement must be agreed to and signed before a salary or bonus becomes payable.

Anything that has already been paid or any accrued payment before the agreement has been made, will not be able to escape paying tax or national insurance, even if given back to the company.

If you feel you might value from speaking to a tax specialist about your own personal situation, please get in touch and we’d be happy to help.

Please note: the Financial Conduct Authority (FCA) does not regulate tax advice.