Purpose of this note
This note provides an overview of the UK Pay as You Earn (PAYE) system and discusses how it is applied to non-UK employees and nationals.
Overview
Pay as You Earn
Pay as You Earn (PAYE) is the method by which UK companies deduct Income Tax and social security tax (called National Insurance Contributions or NICs) from their employees and pay it on to the UK government.
UK employment taxes
Income Tax is a progressive tax that depends on a persons’ income. National Insurance is a social security tax. Class 1 National Insurance Contributions (NICs) are the normal social security contributions that employed people pay. An element is paid by employees and an element by employers. The rules surrounding income and national insurance taxes are complicated, but in essence:
- UK residents normally pay UK income tax on their worldwide earnings and UK National Insurance Contributions on their UK earnings.
- Non-UK residents normally pay UK income tax on their UK earnings. If they organise themselves correctly, they should not normally pay UK National Insurance Contributions.
An overview of the relevant Income Tax and National Insurance rates for the 2019/20 tax year is shown below.
Income Tax bands and rates (2019/20)
| Income Tax band | Income Tax rate | |
| Tax free[1] | Up to £12,500 | 0% |
| Basic rate | The next £37,500 | 20% |
| Higher rate | From £37,501 to £150,000 | 40% |
| Additional rate | Over £150,000 | 45% |
[1] The Personal Allowance reduces by £1 for every £2 of income above the £100,000 limit.
National Insurance (Class 1) bands and rates (2019/20)
| Band | National Insurance rate (employee) | National Insurance rate (employer)[2] | |
| Tax free | Up to £8,632 | 0% | 0% |
| Basic rate | £8,1633 to £50,000 | 12% | 13.8% |
| Higher rate | Over £50,000 | 2% | 13.8% |
[2] The Employment Allowance reduces the employers National Insurance Contributions by up to £3,000/year. This allowance is not available to companies with just one paid person who is also a director.
Who is covered by PAYE
Anyone who is employed in the UK is covered by PAYE, providing they are:
- engaged under a contract of service (employed); or
- an office holder (includes directors, non-executive directors and company secretaries); or
- engaged through an agency or some other third party.
When does a company need to register for PAYE
Companies need to register for PAYE before the first payday. Companies do not need to register for PAYE if all their staff, including director(s):
- are paid less than £118/week; and
- do not get expenses and benefits; and
- do not have another job or get a pension.
Application to directors and company secretaries
Directors, non-executive directors and company secretaries are all defined as office holders and are covered by PAYE. They are treated like other employees, except that there are some special anti-avoidance rules that have been implemented by HMRC to mitigate the power that office holders have. For example, directors:
- emoluments are covered by PAYE, even if the director is self-employed and invoices the company.
- National Insurance is calculated on an annual rather than a weekly or monthly basis.
Application of PAYE to UK nationals
General rule – Income Tax and National Insurance
The general rule is that PAYE covers earnings that a company pays to employees, office holders, agency workers etc., regardless of their nationality.
Companies that employ UK nationals that are resident and domiciled in the UK will normally deduct income tax and national insurance contributions that relate to all earnings and benefits paid for by the UK company, regardless as to whether the work or duties are performed in the UK or abroad. That said, there are exceptions, the most notable of which are if the employee goes abroad for a long period.
Exception – UK national goes abroad for a long period
If a company’s employee leaves the UK, with the intention of not coming back at all, or with the intention of working abroad time for at least 1 full tax year, then the employee may become non-UK resident for income tax purposes. In this case, the company would not need to deduct tax on his non-UK earnings. That said, PAYE records would still need to be submitted for the person.[1] The national Insurance position would depend on the country the employee goes to and the duration of the absence.
UK national goes abroad for a short period
If a company’s employee goes abroad for a short period, then usually the company would continue to operate PAYE in the usual way.
Application of PAYE to non-UK nationals that are UK resident
General rule – Income Tax
With regards to income tax, the application of PAYE to non-UK nationals depends on their residency. If they are UK resident, income tax should be calculated and withheld on all the earnings paid by the company, regardless as to whether the work or duties are performed in the UK or abroad. The non-UK national is, in this case, treated for Income Tax purposes within the PAYE system in the same way as for a UK national, as described above.
Exception – Overseas work-day relief
Under Overseas workday relief, if the employee is not UK domiciled, he may be entitled to be exempted from PAYE on earnings which relate to duties performed overseas, provided that he does not remit these earnings to the UK.[2]
General rule – National Insurance
With regards to National Insurance, UK employers do not have to pay Class 1 NICs for most non-UK employees[3], providing that the employee holds a certificate A1 or Certificate of Coverage issued by the other country showing that they are entitled to pay contributions only in that other country for the period covered by the certificate. Once the certificate has lapsed Class 1 NICs must be paid.
Application of PAYE to non-UK nationals that are not UK resident
General rule – Income Tax
The underlying principle for non-UK residents, with regards to income tax deducted under PAYE is that income tax should only be deducted on earnings that relate to work or duties performed within the UK. In this case, the company should only include the portion that relates to the UK work and duties within PAYE. [4]
Host Employer Regulations
If a foreign company that does not have a place of business in the UK makes their employees available to a UK company, then the law treats the UK company as their employer. This most commonly arises where the UK company is loaned employees from a foreign company linked to the UK company, or where the UK company is supplied with workers by a foreign agency. In these cases PAYE needs to be operated in the usual way.
Exception – International taxation agreements – Article 15 and the 183 day rule
UK double taxation agreements normally contain called a “Dependent Personal Services Article” (Article 15) which is where employment matters are discussed. In most cases this article provides a general rule that salaries, wages and other remuneration may be taxed in the country where the employment is carried out. Therefore, normally, an individual will be taxed on earnings relating to UK work and duties in the UK, whether or not he is resident in the UK. However, most UK double taxation agreements provide that, in certain circumstances, such earnings be exempted from UK tax. This exemption is referred to by HMRC as the 183 day rule. To take advantage of the 183 day rule:
- the employee must not be present in the UK for more than 183 days/year[5]; and
- the employee must be paid by, or on behalf of, a non-UK employer; and
- the pay must not be borne by a UK permanent establishment or fixed base of business.
To claim exemption from deducting UK tax under this clause the UK company will need to apply to HMRC for a “No Tax Code”. The company will need to pay the person through PAYE, but there will be no tax deductions.[6]
Exception – The 60 day rule
For an employee who is in the UK for 59 days/year or less, HMRC have relaxed the rules further, so that it is only necessary to show that the person was paid by a non-UK resident company.
International taxation agreements – Other articles
Many international taxation agreements contain other articles that relate to payments made to non-residents. For example:
- Director’s fees. This article provides clarity on where tax is paid in the case that it is difficult to ascertain where the director’s services are performed. For example, remuneration received by a non-UK resident who is a director of a UK company can be taxed in the UK.
- Independent personal services. This article says that professionals (scientists, authors, artists, teachers, physicians, lawyers, engineers, architects, dentists, accountants etc.) will be taxed in their country of residence unless they have a fixed base in the other country.
- Other. There are often various other provisions that relate to people like artists, athletes, teachers, students etc.
Exception – Employees on secondment to the UK
A company that employs someone who comes to work from abroad must usually operate PAYE in the normal manner. However, NICs for seconded employees are not usually payable for the first 52 weeks after the employee arrives in the UK.
The taxation of UK accommodation and travel expenses
General rule – Ordinary commuting expenses
This is a complicated area that falls outside of this briefing note. We have included it because it is a recurring question that we are often asked.
In general, there is no tax relief for travel between an employer’s home and permanent workplace. A permanent work place is usually the place that the employee needs to attend regularly for the performance of the duties of the employment. If the company pays for these costs, then they are treated as a taxable benefit for both income tax and National Insurance purposes.
HMRC’s view is that a director’s regular place of work, with regard to his UK employment, will be in the UK. This means that and travel and accommodation costs for travel to and from the UK will not usually be a tax deductible expense for the company. This is the case even if the costs are paid for by another company, such as a holding, associate or sister company.
Exception – Temporary workplace
Travel and accommodation between the normal workplace and the temporary workplace and subsistence (including accommodation) whilst at the temporary workplace, are usually allowable expenses.
HMRC normally regard a place as being a temporary workplace if an employee goes there to perform a task of limited duration (less than 24 months) or for a temporary purpose. However, there are various rules that limit this exception. One of these is the fixed-term appointment rule, which prevents a workplace being a temporary workplace where an employee is likely to attend it for all or almost all the period that they are likely to hold the employment.
Exception – Double taxation treaties
If a person or company can claim an exception for treating employment income as UK taxable income, then that exception will usually apply to the provision of employment and other benefits. In this case the company should not have to record the payment as a taxable benefit. However, providing the expense met is “wholly, exclusively and necessarily” incurred for the purpose of the business and that there is no duality of purpose, the expense should be deductible for corporation tax purposes.
Exception – For UK domiciled employees coming from abroad
A UK domiciled employee coming from abroad may be entitled to tax relief for 2 years from the date they came to the UK. This applies if they meet certain conditions. To qualify the employee must:
- Not have been resident in the UK in either of the 2 tax years before coming to the UK; or
- Not have been in the UK, for any reason, at any time in the 2 years before coming to the UK
If either of these apply, then the employee may be entitled to tax relief on the related travel and subsistence (including accommodation) expenses relating to the trip.
Exception – For non-UK domiciled employees
An employee who is not UK domiciled but who works in the UK and meets the necessary conditions for UK domiciled employees may be entitled to tax relief for 5 years from the date they came to the UK.
Furthermore, if the employee’s work in the UK keeps them in the UK for 60 days or more, the cost of their partner and children’s travel (up to a maximum of 2 return journeys for each person for each year can be claimed.)[7]
Accommodation expenses whilst in the UK
It should be noted that accommodation expenses at the regular place of work whilst in the UK are not allowable. HMRC provides the following specific example. https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim35100
Example – If an employee travels from Milan to the UK to work at the employer’s office in London, then the travel costs of a journey from the country outside the United Kingdom in which the employee normally lives to a place in the United Kingdom to perform duties of the employment” are allowable. If the individual travels by train, eats meals on the train and stays overnight in a hotel to break the journey, all of the costs are allowable. However, if the employer pays for the employee’s hotel accommodation in London no deduction is possible.
Reporting obligations of the UK company
The reporting approach of the directors UK company will depend on the form in which accommodation, travel and other benefits are provided.
- If the company contracts for and pays for the accommodation and travel directly, then these costs would normally be treated as a taxable employee benefit and reported on Form P11D.
- If the employee or officer pays for the expenses and is reimbursed by the company, then these costs should be subject to PAYE and income and national insurance tax should be deducted at source by the company.
[1] To take advantage of this, the company would need to give the person a P45 and the person would need to fill in form P85 and send it to HMRC. HMRC would then issue the person with a nil tax code, which the employer would use for PAYE.
[2] Overseas workday relief can usually be claimed if the person: 1) is not UK domiciled; and 2) elects to be taxed on the remittance basis; and 3) carries on duties of employment wholly or partly outside the UK; and 4) the tax year is either; a) the first tax year immediately following three consecutive tax years for which he was not resident in the UK; or b) one of the next two tax years after such a year. If all these conditions are met, those foreign earnings which relate to duties performed overseas are not taxable in the UK unless they are remitted to the UK.
[3] Employers do not usually have to pay National Insurance for employees who have come from a country: 1) in the European Economic Area; or 2) with which the UK has a Reciprocal Agreement; or 3) with which the UK has a Double Contributions Convention.
[4] Where, it is unclear how much of the payment will ultimately be assessable as PAYE income, the whole payment should be subjected to PAYE unless HMRC has directed otherwise. Companies can ask HMRC for a direction that PAYE need only be applied to a certain proportion of the payments made.
[5] Application of the 183 day rule, and what constitutes a year, depends on: 1) the tax treaty; and 2) the year; and 3) the country.
[6] An alternative way of claiming treaty relief would be for the company to operate PAYE in the normal way, but the person to claim relief in his tax return and by claiming double taxation treaty relief.
[7] The additional relief for an employees’ family only applies if the costs are included in the employee’s earnings, for example, where the costs are borne or reimbursed by, or on behalf of, their employer.
Purpose of this note This note provides an overview of the UK Pay as You Earn (PAYE) system and discusses how it is applied to non-UK employees and nationals. Overview Pay as You Earn Pay as You Earn (PAYE) is the method by which UK companies deduct Income Tax and social security tax (called National […]