Waivers of Salary - Pitfalls

When company cash flow is tight, a director may decide to waive salary in order to help ease the cash position. However, care needs to be exercised as unless the waiver is done correctly, the PAYE on the salary waived (which, together with the related National Insurance Contributions, can amount to more than a third of the gross salary) may still be payable.

The reason for this is that under the PAYE rules, a salary can be considered to have been received for PAYE purposes in circumstances in which it has not, in fact, been paid.

The most common situations in which this occurs are when a director becomes legally entitled to a salary payment but does not draw it or when a sum on account of earnings is credited in the accounts of the company. In both of these cases, PAYE will be due on the salary waived.