Being a director does not, in itself, make that individual an employee of the company. A directorship is an office, not necessarily an employment.
However, if the company enters into a service contract with the director, the terms of which make the director an employee, that director is taxed under the same rules as any other employed earner. HMRC considers that an employee is entitled to payment on the earlier of the date stated on their contract or the date of receipt.
Waiving Vs. Deferment
Note that waiving remuneration differs from deferment. Waiving is where the director gives up their right to the remuneration, whilst deferring is where the director postpones the receipt of the remuneration to a later date.
Should a director under a service contract decide to waive their remuneration, it is possible to do so; however, this may require an amendment to the contract or a formal agreement. The waiver must be made before the salary is due to be paid; if waived after that date, the payment may be considered as being income received, and the director could still be liable for income tax and National Insurance contributions (NICs).
Unlike an employee whose company they work for is under a contractual obligation to pay their remuneration, directors who are not employees need not take remuneration if they wish. There may be various reasons for making this decision. For example, if the company is experiencing financial difficulties, directors may waive their remuneration to help reduce the company’s financial burden and improve cash flow.
There may be personal reasons to waive payment (e.g., receiving dividends if a company shareholder rather than salary for tax efficiency, especially if the company is in a position to pay dividends so that the director’s tax liability is reduced).
When Payment is Due
For directors not under contract, there are additional timing rules relating to when the receipt of earnings is determined. Here, the director is entitled to payment when they have access to the funds or can control the receipt, even if they choose not to use the money immediately or decide to waive payment. If the amount is determined before the end of the accounting period, the taxable date is when the accounting period ends. If not determined until after the end of the period, the relevant date is the earlier of the date when the amount is determined or when credited in the company’s accounts (whether or not there is any restriction on the right to draw the sums).
The waiver must be executed before the remuneration becomes due and payable to ensure there is no income tax liability for the waived amount since the director has not received any remuneration. If the waiver occurs after the remuneration is due, HMRC considers this a constructive receipt, and the director remains taxable under PAYE on the remuneration surrendered.
Corporation Tax Deduction
As a deduction in the company’s corporation tax calculation, the basic rule is that where an amount is charged in the accounts in respect of a directors’ remuneration and that remuneration is paid within nine months of the end of that accounting period, it is deductible in computing the profits for that accounting period (if all other conditions for deductibility are met).
If any remuneration unpaid at the year end is paid more than nine months after the end of that year, the deduction is given for the accounting period in which it is paid, rather than for the year to which it relates.
Practical Tip
Waiving a director’s remuneration can be a taxefficient decision if undertaken correctly. To ensure no income tax or NICs liability for the director the waiver must be executed before the remuneration becomes due, is properly documented, and is genuinely intended.