Individual taxation

If a person is going abroad to work as an employee of a UK company, even a UK recruitment company or umbrella company, that company must generally continue to operate the PAYE system in the normal way, but in many cases the employee will become non-resident for UK tax purposes and will be issued with the NT code, so no tax will be deducted from the salary. If the employee is terminating the UK employment and commencing employment with a foreign employer the UK company must issue a form P45 as always on the termination of an employment. The foreign country will then tax the employee’s salary under its usual system.

UK tax residency

The basic residence rule in the UK is that a person who is physically present in the country for 183 days in a tax year is treated as resident in the UK for that tax year. However where an employee goes abroad to take up employment for at least one tax year HMRC will regard that person as non-resident from the date of departure. The income earned abroad by an employee would therefore not be subject to any UK tax (because income earned abroad by a non-resident is outside the scope of UK income tax). In this instance, the individual would be subject to tax in the host country. Typically this would be paid by their employer in the host country which might be the end client, a local subsidiary of the UK company or a local payroll provider. The employee may need to send in a tax return in the host country, especially if any other (non-employment) income is received there. In some cases a tax clearance certificate would need to be obtained from the tax authority before leaving the country at the end of the contract.

Protecting state pension

A person who has lived in the UK for at least three years prior to departure and has paid three years of national insurance contributions may make voluntary (Class 3) national insurance payments during the period of employment abroad.  These payments protect the individual’s right to a state pension and ensure that there is no gap in the contribution record taken into account in computing the eligibility for the state pension.

The Organization for Economic Cooperation and Development (OECD) has issued a Model Tax Convention, regularly updated to keep pace with a changing world, and this is largely adhered to in many of the UK’s double taxation agreements. Article 15 of the Model Tax Convention, entitled Income from Employment has been included in many double tax agreements both by the UK and other countries worldwide.  This article sets out the principle that income from employment is taxable in the state where the employee is present and performing the work. This principle applies to salaries, wages and benefits in kind. This general principle applies without any regard to when the income is paid to the employee.

Exemptions from local tax

Article 15 also provides for an exception from the general rule. An individual rendering services in the course of an employment can be exempt from taxation in the contracting state where the work is performed if certain conditions apply. The first condition is that the employee is present in the other state for not more than 183 days in a tax year. This means that only those staff working abroad for short periods could remain exempt from tax in the destination country. The other conditions are that the salary is paid by an employer who is not resident in the state where the employee is working, and that the remuneration is not borne by a permanent establishment of the employer in that other state. This exemption allows UK employers an opportunity to send employees to work for short periods in other states without becoming liable to tax in those states but would not be helpful to staff going to work abroad for longer terms or working for a foreign employer.

Generally this exemption provided by many double taxation agreements will not apply to employees working abroad. A person leaving the UK to work abroad for more than 183 days will therefore need to carefully study the national tax rules of the host country. Indeed, in the case of countries with which the UK does not have a double tax agreement those tax rules may apply tax to the employment income if the employee is present for less than 183 days. The employer and employee may need to comply with certain formalities such as registrations in the foreign country and it is likely that a salary tax deduction system similar to the PAYE system will apply. The employee may also consider making voluntary Class 3 national insurance contributions in the UK to maintain state pension rights.

Leaving the UK

The tax formalities on leaving the UK should not be neglected. HMRC need to know the date on which the employee is leaving the UK and Form P85 should therefore be completed and sent in. The employee needs to request a UK tax return to declare the income earned in that tax year up to the date of departure from the country. Special rules apply to persons working outside the country for long periods in respect of government service, service for certain EU institutions, development work, or to work on oil and gas platforms. There are also special rules for seafarers, to whom particular deductions from UK tax may apply.

The impact of work permits and work visas

For any work stays of longer than a few weeks the individual will normally require a work permit or work visa from the host country. With few exceptions, such as an intra-company transfer, the work permit must be sponsored by a company incorporated in the host country. That company will almost always also be liable to have the individual on their payroll and be deducting local taxes and social securities on their behalf. 

Work Permit sponsored by local employer

EDITORS NOTE: This will overrule any exemptions to local tax discussed in the previous section. If the individual is on the payroll of a local sponsor then they will have full tax deducted at source. They may be able to claim a rebate on their end of year tax return.

About the author: Peter Hann is an accountant based in Croydon, UK who specialises in international taxation.

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