Temporary pay cuts: Beware of tax issues.

Posted: May 13, 2020
Expert:
Liz Gallagher

As a result of the current crisis some employers are asking employees, to take temporary pay cuts to help stave of financial problems and cashflow issues. Whilst this is all good and well, employers need to make sure that they fully document these arrangements, otherwise they could encounter some unexpected tax problems.

Temporary Pay Cuts

Where employees agree with their employer that they will take a pay cut, but this is not formally documented, then technically the “foregone” pay is still liable to PAYE and employers national insurance. This is obviously a wholly undesirable situation, the last thing anyone wants is for employees to be taxed on salary that they will not receive.

You should therefore ensure that where employees, including directors where applicable, agree to forego pay or bonuses, that this is formalised by away of individual letters or e-mails. We would further recommend that a record is kept of each response and that this record is maintained in the event of a PAYE review at some point in the future.

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