Deceptively complex: UK payroll for departing employees

Deceptively complex: UK payroll for departing employees
22 Mar 2022

Whether they are going on secondment or leaving the UK for good to work remotely overseas, some actions are normally required by UK payroll in respect of departing employees.  

In this article, I explore the key considerations in what can be a deceptively complex area and an area in which sometimes assumptions are made, contributing to errors and non-compliance.  

Not so fast… 

The first key point is don’t rush to change anything! In the first instance, the golden rule for payroll is that nothing should change until the employee’s position has been reviewed from a tax and NIC perspective and, where required, you have been given authority by HMRC (or an overseas tax authority in some cases) to do something different.  

Over the years, I have seen many compliance failures that have resulted from payroll being instructed to “stop PAYE” or “stop NIC” when, in fact, one or both of these should have continued.  

When can PAYE be ceased? 

In the case of employees departing the UK, PAYE can only be ceased once payroll has received a No Tax (“NT”) code. Without an NT code, PAYE should continue, irrespective of how long an employee has spent overseas and whether or not they are also being subject to tax overseas.  

This position caused particular problems during the pandemic since HMRC was taking far longer than normal to issue NT codes. Some employers were pressing HMRC to enable them to ‘self-assess’ NT code whilst they were awaiting authority from HMRC. However, HMRC’s position remains unchanged – until an NT code has been issued by HMRC, PAYE should continue. Relaxing PAYE with no NT code (even where an NT code is later issued) will be considered a compliance failure by HMRC.  

It is not all bad news. The NT will be issued by HMRC where the employee has confirmed to HMRC that they will become or have become non-UK resident (normally along with the submission of Form P85 via which the employee notifies HMRC of their departure).  

So, provided that the employee has specified date of departure, it is normally possible to ‘backdate’ the position when the NT code is received, thereby generating a refund of PAYE from the date of departure.  

If this is not possible (for example because the tax year has ended), the employee should be able to claim back any over-withholding via the filing of Form P85 or, in some cases where requested by HMRC, by filing a UK tax return.  

However, given the potential delays in obtaining an NT code, employees should apply as soon as possible before leaving the UK. Normally, I would recommend that the employee takes advice in this regard to confirm that they will become non-UK resident and also the date that non-residence will commence (since, under the UK Statutory Residence Test, non-residence does not necessarily commence on the date that the employee departs the UK).  

Should PAYE be ceased? 

There are some instances when PAYE should not be ceased. Firstly, if the employee does not become UK resident (e.g. because they go to live/work overseas but remain UK resident due to, for example, substantial return visits to the UK), then an NT code should not be sought.  

In addition, if you expect that the employee will continue to perform duties in the UK as a non-UK resident and the duties are ‘more than incidental’ then PAYE should also continue. The reason for this is that the non-incidental duties of employees of a UK employer are normally subject to UK tax.  

In such cases, the employer may wish to apply for a “Section 690 direction” from HMRC. This direction enables PAYE to be operated on a pro-rata basis. For example, if an individual is paid £50,0000 pe annum and expects to perform 10% of their duties in the UK whilst they are non-UK resident, then a direction may be obtained from HMRC in order that PAYE can be limited to £5,000 of income (i.e. 10% of the employee’s earnings). If the individual is a UK national (or otherwise qualifies for a UK personal allowance), it may be the case that no PAYE is actually deducted (i.e. because the employee’s deemed UK sourced income falls beneath the UK personal allowance).  

Note that the Section 690 direction does not apply to National Insurance Contributions (see below). That is, if NIC is required then the NIC should be operated on all income, irrespective of the limited number of UK duties.  

When can NIC be ceased? 

NIC can be more difficult than PAYE to manage for employees departing overseas. The reason for this is that the NIC position depends on several variables, including the country in which an individual is going to live and work, the duration of the period of work overseas and where the individual will be performing duties.  

The reality is that, in some circumstances, NIC will need to continue and in others, it should cease. It is an area where even though there is guidance available, I would recommend professional advice is sought, not least as it can have a significant impact on an employee’s entitlement to certain state benefits and also, potentially, access to state healthcare overseas.  

We will be devoting an article to this in the coming weeks. In the meantime, some key points: 

  • If an employee is going to live and work in an EU/EEA country or Switzerland indefinitely and will perform at least 25% of their total working duties there, then it is likely that the UK employer will be required to register for social security overseas. Normally, NIC will cease and non-UK employer and employee contributions will be required via a non-UK payroll.  
  • Where an employee is going to work in a country with which the UK has a reciprocal agreement then social security will normally be due in that country (rather than the UK) where the period of work overseas is indefinite. Where there is a temporary secondment, then the employee will normally remain subject to NIC for a period specified under the agreement. For example, in the US/UK reciprocal social security agreement, the employee will remain subject to NIC for up to 5 years where the intention is that the employee is seconded to the US for a period that is not expected to last for more than five years.  
  • Where an employee is going to work in a country outside the EU/EEA and where the UK does not have a reciprocal social security agreement, NIC is normally due for the first 52 weeks of the period of work overseas and can then cease thereafter.  

Above are just some examples of the potential NIC position and so, as indicated, advice should really be sought and particularly on this aspect.  

Additional considerations:

Trailing income 

Employers should identify where the employee has any ‘trailing income’. This is generally where the employee is paid income after they have left the UK but the income relates to their period of residence and employment in the UK. The reason for this is that such income will likely be subject to PAYE, even where the employee has become a non-UK resident and there is an NT code in place. The reason for this is that the UK will seek to tax any income that relates to a period of UK residence, even where it is paid at a later date.  

For example, the employee may be paid a bonus in a period of non-residence that relates to the previous year when they were resident in the UK. In this case, HMRC would expect the UK employer to operate PAYE on the bonus, even where there is an NT code in place. In effect, the NT code would need to be suspended for that particular payment.  

The same ‘trailing income’ concept can also apply to income from share incentive arrangements. For example, where the period from grant to vest of share (or grant to exercise in some cases) straddles a period of residence across the UK and the host country, PAYE is likely to be due on the portion of any share option gain allocated to the period of UK residence.  

Auto-enrolment 

Employers will need to consider whether the employee should remain in a UK pension arrangement where they are currently auto-enrolled. Generally, for temporary secondments overseas, auto-enrolment will continue to apply to the employee. For indefinite moves overseas, auto-enrolment requirements will normally cease on departure. However, this is not a straightforward area, involves pensions law and, as such, advice should be sought where there is any doubt.  

Non-UK income 

Where an employee is being seconded to a ‘host company’ overseas then particular care should be taken to ensure that PAYE and NIC are operated correctly (where it is still required) in respect of any income that is paid overseas. For example, if a UK employee is seconded to work for an Australian subsidiary, it is likely that NIC will be required for the first 52 weeks of the secondment (even if the employee is non-resident and there is a No Tax code). The NIC would be required on all UK paid income and any income that is paid by the subsidiary in Australia.   

As you can see from above, departing employees can be more complex to manage from a payroll perspective than first meets the eye. The key to getting payroll right is correctly determining the global mobility tax and social security position, including the key points above, as this will inform what is required from a payroll perspective.  


Author: Lee McIntyre-Hamilton

Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations.  Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.


Contact Lee:  lee@globalpayrollassociation.com

 

 

Whether they are going on secondment or leaving the UK for good to work remotely overseas, some actions are normally required by UK payroll in respect of departing employees.  

In this article, I explore the key considerations in what can be a deceptively complex area and an area in which sometimes assumptions are made, contributing to errors and non-compliance.  

Not so fast… 

The first key point is don’t rush to change anything! In the first instance, the golden rule for payroll is that nothing should change until the employee’s position has been reviewed from a tax and NIC perspective and, where required, you have been given authority by HMRC (or an overseas tax authority in some cases) to do something different.  

Over the years, I have seen many compliance failures that have resulted from payroll being instructed to “stop PAYE” or “stop NIC” when, in fact, one or both of these should have continued.  

When can PAYE be ceased? 

In the case of employees departing the UK, PAYE can only be ceased once payroll has received a No Tax (“NT”) code. Without an NT code, PAYE should continue, irrespective of how long an employee has spent overseas and whether or not they are also being subject to tax overseas.  

This position caused particular problems during the pandemic since HMRC was taking far longer than normal to issue NT codes. Some employers were pressing HMRC to enable them to ‘self-assess’ NT code whilst they were awaiting authority from HMRC. However, HMRC’s position remains unchanged – until an NT code has been issued by HMRC, PAYE should continue. Relaxing PAYE with no NT code (even where an NT code is later issued) will be considered a compliance failure by HMRC.  

It is not all bad news. The NT will be issued by HMRC where the employee has confirmed to HMRC that they will become or have become non-UK resident (normally along with the submission of Form P85 via which the employee notifies HMRC of their departure).  

So, provided that the employee has specified date of departure, it is normally possible to ‘backdate’ the position when the NT code is received, thereby generating a refund of PAYE from the date of departure.  

If this is not possible (for example because the tax year has ended), the employee should be able to claim back any over-withholding via the filing of Form P85 or, in some cases where requested by HMRC, by filing a UK tax return.  

However, given the potential delays in obtaining an NT code, employees should apply as soon as possible before leaving the UK. Normally, I would recommend that the employee takes advice in this regard to confirm that they will become non-UK resident and also the date that non-residence will commence (since, under the UK Statutory Residence Test, non-residence does not necessarily commence on the date that the employee departs the UK).  

Should PAYE be ceased? 

There are some instances when PAYE should not be ceased. Firstly, if the employee does not become UK resident (e.g. because they go to live/work overseas but remain UK resident due to, for example, substantial return visits to the UK), then an NT code should not be sought.  

In addition, if you expect that the employee will continue to perform duties in the UK as a non-UK resident and the duties are ‘more than incidental’ then PAYE should also continue. The reason for this is that the non-incidental duties of employees of a UK employer are normally subject to UK tax.  

In such cases, the employer may wish to apply for a “Section 690 direction” from HMRC. This direction enables PAYE to be operated on a pro-rata basis. For example, if an individual is paid £50,0000 pe annum and expects to perform 10% of their duties in the UK whilst they are non-UK resident, then a direction may be obtained from HMRC in order that PAYE can be limited to £5,000 of income (i.e. 10% of the employee’s earnings). If the individual is a UK national (or otherwise qualifies for a UK personal allowance), it may be the case that no PAYE is actually deducted (i.e. because the employee’s deemed UK sourced income falls beneath the UK personal allowance).  

Note that the Section 690 direction does not apply to National Insurance Contributions (see below). That is, if NIC is required then the NIC should be operated on all income, irrespective of the limited number of UK duties.  

When can NIC be ceased? 

NIC can be more difficult than PAYE to manage for employees departing overseas. The reason for this is that the NIC position depends on several variables, including the country in which an individual is going to live and work, the duration of the period of work overseas and where the individual will be performing duties.  

The reality is that, in some circumstances, NIC will need to continue and in others, it should cease. It is an area where even though there is guidance available, I would recommend professional advice is sought, not least as it can have a significant impact on an employee’s entitlement to certain state benefits and also, potentially, access to state healthcare overseas.  

We will be devoting an article to this in the coming weeks. In the meantime, some key points: 

  • If an employee is going to live and work in an EU/EEA country or Switzerland indefinitely and will perform at least 25% of their total working duties there, then it is likely that the UK employer will be required to register for social security overseas. Normally, NIC will cease and non-UK employer and employee contributions will be required via a non-UK payroll.  
  • Where an employee is going to work in a country with which the UK has a reciprocal agreement then social security will normally be due in that country (rather than the UK) where the period of work overseas is indefinite. Where there is a temporary secondment, then the employee will normally remain subject to NIC for a period specified under the agreement. For example, in the US/UK reciprocal social security agreement, the employee will remain subject to NIC for up to 5 years where the intention is that the employee is seconded to the US for a period that is not expected to last for more than five years.  
  • Where an employee is going to work in a country outside the EU/EEA and where the UK does not have a reciprocal social security agreement, NIC is normally due for the first 52 weeks of the period of work overseas and can then cease thereafter.  

Above are just some examples of the potential NIC position and so, as indicated, advice should really be sought and particularly on this aspect.  

Additional considerations:

Trailing income 

Employers should identify where the employee has any ‘trailing income’. This is generally where the employee is paid income after they have left the UK but the income relates to their period of residence and employment in the UK. The reason for this is that such income will likely be subject to PAYE, even where the employee has become a non-UK resident and there is an NT code in place. The reason for this is that the UK will seek to tax any income that relates to a period of UK residence, even where it is paid at a later date.  

For example, the employee may be paid a bonus in a period of non-residence that relates to the previous year when they were resident in the UK. In this case, HMRC would expect the UK employer to operate PAYE on the bonus, even where there is an NT code in place. In effect, the NT code would need to be suspended for that particular payment.  

The same ‘trailing income’ concept can also apply to income from share incentive arrangements. For example, where the period from grant to vest of share (or grant to exercise in some cases) straddles a period of residence across the UK and the host country, PAYE is likely to be due on the portion of any share option gain allocated to the period of UK residence.  

Auto-enrolment 

Employers will need to consider whether the employee should remain in a UK pension arrangement where they are currently auto-enrolled. Generally, for temporary secondments overseas, auto-enrolment will continue to apply to the employee. For indefinite moves overseas, auto-enrolment requirements will normally cease on departure. However, this is not a straightforward area, involves pensions law and, as such, advice should be sought where there is any doubt.  

Non-UK income 

Where an employee is being seconded to a ‘host company’ overseas then particular care should be taken to ensure that PAYE and NIC are operated correctly (where it is still required) in respect of any income that is paid overseas. For example, if a UK employee is seconded to work for an Australian subsidiary, it is likely that NIC will be required for the first 52 weeks of the secondment (even if the employee is non-resident and there is a No Tax code). The NIC would be required on all UK paid income and any income that is paid by the subsidiary in Australia.   

As you can see from above, departing employees can be more complex to manage from a payroll perspective than first meets the eye. The key to getting payroll right is correctly determining the global mobility tax and social security position, including the key points above, as this will inform what is required from a payroll perspective.  


Author: Lee McIntyre-Hamilton

Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations.  Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.


Contact Lee:  lee@globalpayrollassociation.com

 

 

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