Paying Overseas Employees - A Guide To PAYE and Social Security Considerations
If your business is considering making an overseas hire, then congratulations – in business, expanding internationally can be extremely rewarding, both financially; in terms of driving the growth of the business and discovering new markets to sell your product into; and culturally – seeing how things get done in contrasting business environments can only help give a business owner a more holistic view of their enterprise.
But from an administrative and tax perspective, hiring overseas is complex and to get it right involves a significant amount of extra work – we have written the following notes to try to help all business owners understand what needs to be done before you can start to make payments to overseas staff.
Of course, once everything is in place, at The Money Cloud we have a range of excellent overseas payments providers we’d be happy to introduce you to. To get started, simply try our online widget.
In the UK, an employer is obliged to take care of both PAYE and National Insurance Contributions, and it is essential that the company remains compliant for payment of the right taxes, and social security withholding on any employment related earnings it pays out.
When making your first overseas hire, you first want to consider UK tax implications, because you are, presumably, offering a UK contract of employment.
If your employee is not a UK resident, the likelihood is that you will not need to have to withhold PAYE, and can therefore issue payment on a gross basis, via a UK payroll.
You must make sure, however, that the non-resident employee is not performing any duties within the UK that could be deemed to be anything other than “incidental duties”, that would be ancillary tasks such as training courses or meetings back at head office.
You must also make sure that your employee is not, and has never been, resident in the UK, and has no intention of relocating to the UK.
Provided your company does not have a corporate presence in the country where the employee is working, no tax withholding is required, but the employee will most likely to subject to that country’s tax regime, and will therefore have to complete a tax return in that country.
It’s important to make sure that whatever tasks your employee is performing overseas does not result in your firm becoming a corporate presence in the country.
If it transpires that their actions do result in your firm being deemed to have a corporate presence in that country, or you decide to set up a corporate presence there, then a good course of action is to set up an overseas payroll, and pay the employee in this way, taking care to ensure that you are fulfilling the tax withholding obligations for that country.
If your employee is being paid via a payroll that you have set up as a corporate entity in an overseas location, and their activities in the UK are deemed to be more than incidental, then a situation could arise in which the employee is subject to “double withholding”, where you are withholding PAYE you are obligated to pay due to your employees’ activities in the UK, and withholding because of their obligation to pay their taxes in their country of residence.
If this happens, a business can apply to HMRC for overseas tax due to be offset against PAYE each month.
The situation is different again if you have sent an employee who is resident in the UK on secondment to a different country. The employee will still be subject to PAYE if they remain officially resided in the UK whilst overseas, and if they continue to be employed by the UK branch of the business whilst they are overseas.
If the employee is due to remain overseas in the same location for more than three years, it is a good idea to pay that individual, if possible, via an overseas entity, to avoid “double withholding”.
Ultimately, it is the employee’s tax position, and not their location, that often determines whether there is a withholding requirement.
In 2014, HMRC introduced a statutory residence test to help determine whether a seconded employee should be treated as a resident in the UK or not.
The only way to avoid withholding PAYE for an overseas employee resident in the UK would be to pay them from an overseas entity, via an overseas payroll that you have set up. In that situation, it would be the employee’s responsibility to settle their own personal UK tax liability by filing a tax return in the UK.
If the employee eventually becomes non-resident in the UK after a longer period overseas, but is still being paid from a UK entity, a business can apply to HMRC for an NT code, meaning the employee can subsequently be paid on a gross basis, and simply settle all their tax obligations overseas.
As you can see, the situation regarding whether to withhold PAYE for overseas employees is far from simple and requires careful consideration, as well as close communication with HMRC.
But PAYE is only half of the story, of course; now let’s consider Social Security I.e. National Insurance contributions.
In most countries, social security contributions are treated completely separately from tax and depends on where the employee has been seconded, for how long, and whether the employee will be paid from a UK entity throughout the duration of their stay.
It may be the case that an employee no longer requires PAYE withholding, but chooses to continue to pay their National Insurance contributions, or indeed, an employee may decide to voluntarily continue to pay their contributions to make sure they are eligible for a state pension when they are older.
We’d like to acknowledge the help provided in writing this guide by HRZone.