Working abroad – PAYE aspects

PAYE when you go abroad

The purpose of this note is to explain the UK payroll situation when an employee of a UK company goes to work abroad. It is a question that we have recently been asked because Covid has forced lots of employees to stay abroad for longer than they had initially anticipated.

Basic rule

The basic rule that applies in most countries is that employees need to pay payroll taxes in the country where they are working. For example, an Italian working in the UK would usually need to pay tax in the UK under the UK PAYE scheme. Likewise, an English person working in Italy would need to pay taxes in Italy under the Italian “Rapporto di Lavoro Subordinato” scheme (please forgive my Italian).

However, many tax treaties have an exception that allow people to be seconded from a business in one country to work overseas for up to six months without having to pay payroll taxes in that country. For example, Article 6 of the Italy UK Tax Treaty allows a UK resident employed by a UK company to work in Italy (for the same UK Company) for up to six months without having to register for Italian payroll taxes.

Going abroad for longer periods

As a rule of thumb, staff that work abroad for more than 6 months, run the risk of losing their UK tax residency and becoming tax resident in the other country. The way that the UK system copes with this is as follows:

  • Employee fills in form P85 and sends it to HMRC – If the employee will cease to be UK resident (which is determined by something called the Statutory Residence Test) the person should complete form P85 before he leaves the UK and send this to HMRC.
  • HMRC issues a No Tax Code – When HMRC receives the form P85 it issues the employee and employer with a UK “no tax payroll code”. This means that the employee can be kept on UK PAYE but no UK tax is deducted.
  • Employer gives the employee an overseas letter – The UK employer gives the employee a letter that says the date they went abroad, their gross pay and the UK tax deducted from the start of the tax year to their departure date
  • Employee and the employer seek local advice – The employee will need to seek local advice to ensure that he is compliant with local tax rules.

Implications for furlough

The precise implications for Furlough are not completely clear to us (we have tried to resolve the matter various times, with HMRC and other parties, but without complete success). It seems odd to us that a person living overseas can claim furlough. However, our understanding is that a person living overseas is allowed to claim UK Furlough, provided that the person is obliged to be included in UK PAYE. So, providing the person that has gone overseas has been properly issued a No Tax Code, or remains UK Tax Resident, it seems to us that under the rules they can still be on Furlough

National Insurance

A person is only entitled to a UK State pension if he has a number of qualifying payment years. This means that to avoid gaps when he goes overseas he may need to continue to pay UK National Insurance. If the person wants to continue to pay UK National Insurance Contributions, then he can (for two years) providing he/she completes form CA3822. After this the person would need to make voluntary contributions.

Further help

If you need any help on this, or any other matter, please call one of the team.

PAYE when you go abroad The purpose of this note is to […]

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