Do you have overseas staff?
Brexit and the pandemic resulted in many workers leaving the UK to return to their home country. If you have employees dotted around the globe, what are your payroll obligations? Head of Payroll Joanne Gibson discusses below.
If an employee is not tax resident in the UK, generally you don’t need to deduct PAYE unless they perform some of their duties here. There is a statutory residence test to determine if an employee is resident in the UK but as long as they are not in the UK for 183 days or more in a tax year then they will be automatically considered non-resident.
PAYE if duties not performed in UK
If there’s no PAYE obligation, you can pay a non-resident employee on a gross basis via a UK payroll.
Until an employee has been out of the UK for a full tax year, UK PAYE will continue to apply so tax should be deducted using the employee’s current tax code.
If the employee has previously been resident in the UK, you will need to submit a Form P85 to HMRC so that an NT (“No Tax”) PAYE code can be issued. Note. An NT tax code will only be issued by HMRC if the employee’s UK tax affairs are up to date.
If the employee is performing all their duties of employment outside the UK, it’s highly likely that they will be subject to tax in the country where they are based.
In certain situations, the UK employer may be required to deduct foreign tax from salary payments and pay this over to the overseas tax authority.
Seek advice from an accountant in the other country to confirm whether you have an obligation to withhold foreign tax.
PAYE if duties performed in UK
Non-resident employees could still have to pay tax in the UK if they perform some of their duties in the UK. You can use time apportionment to work out how much of their salary should be taxed in the UK.
Duties that are “merely incidental” do not count as duties performed in the UK. Examples of merely incidental duties in HMRC’s guidance include arranging meetings and business travel, reading generic business e-mails that do not relate directly to the employee’s role and attending the UK for the employee’s own performance appraisal.
NI contributions for overseas employees do not automatically follow the PAYE treatment. An employee’s earnings are normally either completely within the UK NI regime or completely in the other country’s social security regime. Unlike PAYE, it’s not normally possible to apportion earnings so that UK NI applies only to UK duties.
The rules for NI depend on which country your employee is working in.
In some cases, it may be possible to make an application for a certificate of continuing liability. Known as A1 certificates, they are designed to avoid employees making social security contributions in countries where they are only present for a short time or in countries where they only carry out a small amount of their duties.
If an A1 certificate is in place, it means that contributions can continue to be made in the country that the employee has left temporarily, and no contributions need to be made in the local country.
Following the UK leaving the EU on 31 December 2020, A1 certificates for new job placements commencing after this date can only cover a maximum period of two years. After that, social security contributions need to be paid in the country in which the employee is working.
Given that the 24-month limit is a new rule which has come into force following Brexit, if you have an existing A1 certificate which started before 31 December 2020, you should assume that it expired on 31 December 2022 and that you will need to make arrangements to pay overseas NI from 1 January 2023 onwards if the employee remains working outside the UK on this date.
If an employee is not resident in the UK, you generally don’t need to deduct any PAYE on their earnings unless they perform some of their duties here. The rules for NI depend on which country your employee is working in. In some cases, you can apply for a certificate of continuing liability which means that you will continue to deduct NI in the UK if the employee goes overseas but do note that these only last for 24 months.