UK employers with overseas employees

What are the implications for UK employers employing workers who are resident outside the UK?

15 August 2023 - Samantha Stent

The Covid pandemic resulted in many workers leaving the UK to return to their home country. Combined with the huge increase in opportunities to work remotely in many sectors, it is now commonplace for UK companies to have workforces who are dotted around the globe.  But what are the implications for UK employers if they employ workers who are resident outside the UK?

PAYE: Income Tax

If an employee is not resident in the UK, generally no PAYE income tax deductions are due unless the employee performs some of their duties in the UK.  If there is no PAYE obligation, it is possible to pay a non-resident employee on a gross basis via a UK payroll.  If the employee in question has previously been resident in the UK, a Form P85 will need to be submitted to HMRC so that an NT (“No Tax”) PAYE code can be issued (NB 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 is highly likely that they will be subject to tax in the country where they are based.  In certain situations, a UK employer is liable to deduct foreign tax from salary payments and pay this over to the overseas authority.  Local advice will therefore be required in most cases to confirm whether the employer has an obligation to withhold foreign tax.  Scrutton Bland LLP is a member of Nexia International, a global network of accounting and consultancy firms, and we regularly assist employers in obtaining this advice.

Even if local advice suggests that there is no legal requirement to do so, a UK employer may still choose to register for payroll taxes in the employee’s home country on a voluntary basis to ensure all of its overseas tax withholding obligations are fulfilled and also to simplify tax reporting for the individual employee.  If no overseas withholding tax is applied and employees are paid via a UK payroll on a gross basis, the employee will need to settle any taxes due in their country of residence by filing a tax return in that country.  Setting up an overseas payroll for a UK company is also something with which our Nexia colleagues around the globe can assist.

PAYE: National Insurance Contributions

The position for National Insurance Contributions (NIC) in respect of overseas employees does not automatically follow the PAYE income tax treatment. An employee’s earnings are normally either completely within the UK NIC regime or completely in the other country’s social security regime; unlike PAYE, it is not normally possible to apportion earnings so that UK NICs apply only to UK duties.

In some cases it may be possible to make an application for a certificate of continuing liability.  These certificates, also known as A1 certificates, 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, we are advising clients to assume that existing A1 certificates which started before 31 December 2020 will expire on 31 December 2022 and that arrangements to pay overseas NICs will need to be made from 1 January 2023 if the employee remains working outside the UK on this date.

Permanent Establishment

An overseas employee’s precise role and responsibilities often need to be managed carefully in the country where they are based.  This is because corporation tax registration may be required if it is deemed that the presence of the employee leads to the creation of a ‘permanent establishment’ for the employer in that jurisdiction.

Other issues

Employment Law – Regardless of whether a UK employment contract is in place, an employee may acquire local employment rights if they work in another jurisdiction – these can include minimum rates of pay, annual leave and rights on termination of employment.

Data protection – Additional protections may be required if data is transferred from outside the UK and employers should consider whether any work undertaken by an overseas employee could lead to a breach of any data protection law. Changes may also be required to internal GDPR policies and procedures.

Health & Safety – Employers continue to owe their employees a duty of care to provide a safe place of work even where the employee is working abroad. Employers will therefore need to comply with both UK and local health and safety laws and should ideally carry out risk assessments regarding the employee’s overseas working environment.

Insurance – Employers should check that employees working overseas are covered by their insurance policies.

Currency – Fluctuations in currency can affect a foreign employee’s net pay, so some cross-border employers implement a currency exchange agreement to offset these fluctuations.

If you have overseas employees or would like to discuss any of the issues raised in this article, please contact Samantha Stent.

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