Employees working abroad – income tax and social security guidance

Working outside of the UK - A brief guide for employees

This insight is designed to provide an overview of the UK income tax and social security implications for an employee leaving the UK to work overseas.

This could be an employee sent to work overseas for a temporary secondment or an employee relocating overseas on a permanent basis. It will also be of relevance for employees that live in the UK but travel overseas for work purposes.

This insight has been prepared with the employee in mind, however, some sections may still be of relevance for other individuals, such as the self-employed.

It does not consider other taxes or comment on immigration issues. It is also not intended to be a substitute for comprehensive, professional advice and should not be relied upon as such.

Remaining employed by a UK business

A UK employer should already be operating a payroll to account for wage tax (income tax) and social security contributions (National Insurance Contributions – NIC) and these are typically withheld at source via ‘Pay As You Earn’ – PAYE and paid to the UK tax authority (HMRC).

Therefore, an employee leaving the UK will need to determine what their ongoing UK tax and social security position will be in the UK.

In the UK, residence is determined with reference to a Statutory Residence Test (SRT) that aims to identify if an employee is resident or not resident in the UK. It is common for employees that start to work overseas to depart the UK part way through the UK tax year and the SRT recognises several scenarios where the UK tax year can be split, so, in effect, the employee has a resident period followed by a not resident period within the same UK tax year.

For employees that remain employed by their UK employer but are expected to become not resident in the UK (and who will not be performing any UK workdays) it would be prudent to obtain a No Tax (NT) code from HMRC, so no income tax is withheld in the UK.

Alternatively, employees that expect to become not resident in the UK but do still expect to perform some UK workdays should consider a s690 direction instead, which, if approved by HMRC, will allow the UK employer to operate reduced tax withholding in line with the employee’s anticipated UK workdays.

A section 690 direction can also be considered where the employee remains resident in the UK, in line with domestic legislation, but, by virtue of a Double Taxation Agreement (DTA) with the other country, they are treaty not resident in the UK.

For employees that regularly return to the UK, or who are seconded for only a short time overseas (so they do not break residence from the UK in line with the SRT) it is often necessary to consider whether there is a DTA in place between the UK and the other relevant country.

The DTA will help to determine in which country the employee is treaty resident and which country has the first right to tax their income. This can include employment income as well as personal investment income or capital gains and, depending on the type of earnings, there may be varying tax treatment.

In most cases, it is beneficial to file a Self-Assessment (SA) tax return to make sure that the correct UK residence position is recorded, particularly where it is possible to ‘split’ the UK tax year or if it is necessary to consider the treaty residence position in line with a DTA.

Filing a Self-Assessment (SA) tax return can help to ensure that remuneration that falls within the period after departure is not inadvertently subject to tax in the UK and that the taxable remuneration receives the benefit of a full years’ worth of rate bands and allowances (where applicable) all of which can help to reduce the final UK tax position.

In some cases, it is mandatory to file a Self-Assessment (SA) tax return, for instance, where a section 690 direction is in place, or should the UK employer be operating a modified payroll arrangement whilst the employee is posted overseas.

Regarding social security, a social security agreement between the UK and the employee’s new overseas country may mean that they are exempt from social security overseas and they can instead continue to make contributions in the UK.

This is especially important to consider where the employee is only working overseas for a short time, or if they regularly work between their overseas country and the UK, as it will ensure they maintain their contribution history in the UK and retain their entitlement to certain benefits in the UK, such as their state pension.

The UK has several social security agreements in place with common overseas destinations, such as the USA, and, since the UK’s departure from the EU, the recent Trade and Cooperation Agreement (TCA) contains protocols on social security coordination between the UK and the EU, which should be considered.

Provided they are eligible, a Certificate of Coverage can be obtained to keep the employee in the UK social security system, albeit for a limited duration in some cases.

Where no social security agreement is in place, the employee may have to continue to contribute NIC in the UK for the first 52 weeks (and may also have to contribute overseas).

Working abroad for an overseas businesses

When an employee relocates to work for an overseas employer on a permanent basis, they should still consider their UK residence position in line with the SRT to ensure they know what their ongoing UK tax and social security position will be in the UK, however, as wage taxes and social security contributions are generally paid in the country in which an employee works, it is more likely that the income tax and social security obligation will shift to the new country of employment.

This said, if the employee regularly spends time living or working in the UK, they may also be due to pay tax and social security contributions in the UK, so it is again necessary to consider whether a DTA is in place and what social security agreements may be relevant.

For employees that have a history of working in the UK and who may wish to maintain their entitlement to certain benefits in the UK, such as their state pension, it is possible to make voluntary National Insurance contributions to HMRC.

In most cases, it is beneficial to file a Self-Assessment (SA) tax return to make sure that the correct UK residence position is recorded, particularly where it is possible to ‘split’ the UK tax year or if it is necessary to consider the treaty residence position in line with a DTA.

Filing a Self-Assessment (SA) tax return can help to ensure that remuneration that falls within the period after departure is not inadvertently subject to tax in the UK and that the taxable remuneration receives the benefit of a full years’ worth of rate bands and allowances (where applicable) all of which can help to reduce the final UK tax position.