Guide to UK payroll compliance for overseas employers
Peter Abbott · August 7th 2023 · read
There is a wide spectrum of issues for overseas (non-UK) employers to consider when they have employee(s) working in the UK, ranging from recruitment and immigration challenges to corporate tax filing requirements and VAT matters.
These employee(s) may be seconded to work in the UK for a temporary basis or they may be employee(s) relocating to the UK on a permanent basis. Alternatively, they may be employee(s) that live overseas but travel regularly to the UK for work purposes.
Whatever the working arrangements, there are UK payroll and statutory employment obligations to address, and this document provides a high-level overview of the more common compliance and payroll aspects that overseas (non-UK) employers must consider.
This insight will assist overseas (non-UK) employers that have had little or no previous experience with working in the UK, as well as a helpful reminder for those already more familiar with the UK system.
It does not consider other taxes or comment on immigration issues. It is also not intended to be a substitute for comprehensive, professional advice and should not be relied upon as such.
What are the Payroll Tax Reporting Requirements in the UK?
Wage taxes and social security contributions are generally paid in the country in which the employee(s) are working. In the UK, wage tax (income tax) and social security contributions (National Insurance Contributions – NIC) are typically withheld at source from an employee via a payroll operating ‘Pay As You Earn’ – PAYE and paid to the UK tax authority (HMRC).
However, whether an overseas (non-UK) employer has a payroll reporting obligation in the UK, or not, is determined by whether they have a ‘sufficient presence’ in the UK and whether income tax or NIC is due.
Having a sufficient presence in the UK can be easier to determine in some case than with others, for instance, an overseas employer looking to create a formal entity in the UK will likely have a sufficient presence for payroll reporting obligations. However, having just one employee working remotely from the UK for their overseas employer may not.
There are also local employment requirements to consider, such as the overseas employer having to automatically enrol the employee(s) in a UK pension scheme.
It is therefore important for non-UK employers to assess what payroll reporting obligations may arise given the employer and the employee(s) specific circumstances.
If it can be determined that an overseas employer does not have a UK payroll reporting obligation, then alternative methods of ensuring the correct income tax and NIC is paid to HMRC can be considered, which may be more cost effective and less onerous to administer.
On the other hand, if the overseas employer has a UK payroll reporting obligation, it is equally as important to ensure that the correct payroll mechanism is employed to ensure any allowable income tax relief or NIC exemptions are considered, which can eliminate double charges for the employer and the employee.
Each overseas employer will need to ensure they assess their own reporting obligations depending on their, and their employee(s) circumstances, on a case-by-case basis.
Are their Alternative Payroll Arrangements?
Some pay arrangements can include Direct Payment Schemes, where, by mutual consent, the employee(s) administer their own payroll submissions to HMRC on behalf of the employer, saving the overseas (non-UK) employer from registering in the UK.
Alternatively, the employee(s) could simply register and file their own UK self-assessment tax return to account for the income tax due.
HMRC may also approve specific arrangements, for eligible employee(s) for reduced income tax withholding in recognition that the employee(s) may have continuing wage tax obligations in their home jurisdiction.
What are the UK’s Treaties and Reciprocal Agreements?
The UK has Double Taxation Agreements (DTAs) in place with many overseas jurisdictions and these can allow for income tax relief in the UK (in full or in part) to be recognised via a modified payroll arrangement.
The UK also has several reciprocal agreements for social security purposes in place with other jurisdictions, which can help to mitigate double social security charges. Similarly, since the UK’s departure from the EU, the Trade and Cooperation Agreement (TCA) contains protocols on social security coordination that could potentially eliminate double social security charges.
What are HMRC Modified Payroll Arrangements?
There are several modified payroll arrangements that HMRC will allow eligible employers to administer, and each type of scheme has its own advantages, but the distinguishing feature with these arrangements is that they are more flexible than a standard domestic UK payroll. They recognise that employers with cross border arrangements offer unique challenges that are not well suited to a normal UK payroll.
By way of an example, certain modified payroll arrangements allow for the relaxation of the usual payroll reporting requirements for eligible employee(s) that come to work in the UK on a short term basis (known as a Short Term Business Visitors – STBVs) on the understanding that ultimately no income tax would be due in the UK if they were to be processed via a standard UK payroll due to the existence of a DTA or because of their level of earnings. The scheme allows for a single, annual submission to HMRC to fulfil the employers’ compliance obligations rather than processing a UK payroll each month.
Another modified payroll arrangement allows for the employee(s) UK income tax withholding to be reduced, each pay period, in line with foreign taxes withheld in another jurisdiction, so the employee(s) do not have to wait until the end of the tax year to make a claim for a foreign tax credit and receive a repayment from HMRC. There will still be a requirement to file a self-assessment tax return, but the employee(s) can effectively benefit from a claim for a foreign tax credit each pay period.
A further modified payroll arrangement is best suited for employee(s) sent to the UK who are tax equalised (so they are no better or worse off for having come to the UK and their net pay remains consistent). The employer settles the tax due in the UK on behalf of the employee(s) but the arrangement can allow for payroll adjustments to claim eligible tax relief that can help to reduce the employers tax liability in the UK, which is very beneficial from a cash flow perspective. Moreover, should there be five or fewer employee(s) on the modified payroll scheme, the payroll can be administered quarterly rather than processing a UK payroll each pay period, which can help to reduce payroll compliance costs.
The most appropriate modified payroll scheme for an employer will be dictated by the specific circumstances of the employer and the employee(s) but the benefits of operating a modified payroll can be persuasive.
There are many important aspects for overseas (non-UK) employers to address when their employee(s) are working from the UK, whether this is part of a planned expansion into the UK or if they just want to support their employee(s) with the option of working remotely from the UK.
UK payroll compliance and statutory employment requirements are an important aspect of working in the UK.
There are a variety of payroll solutions and modified payroll schemes, which are recognised by HMRC as effective, alternative payroll solutions to often challenging cross border working arrangements, which can help to alleviate some of the complexity and provide real cost savings for the employer and the employee(s).
Get in touch
Our specialist Human Capital Advisory (HCA) team can help you navigate these issues and assist you with tailoring a bespoke solution to meet the needs of your business. Do get in touch with Peter Abbott if these issues affect you and would like to learn more.