Are you a UK employer interested in hiring global remote talent? If so, you're not alone. Many businesses do just that to access specialized skills and knowledge from talent pools worldwide.
But it's not as simple as it sounds. When you hire international employees, you have to figure out how to manage their pay, pay taxes, collect income taxes, and manage payroll reports while staying on top of various legal matters. It can get complicated quickly and cause issues for employers with overseas employees.
In fact, ADP conducted a study and found that only 33% of 1,486 global payroll professionals can maintain a payroll accuracy rate of 90% or higher across all their operating countries, down from 52% before 2020.
In this article, we'll explain the important things you need to know about incorporating global remote workers into your UK payroll system. We'll cover topics like UK payroll taxes for employers, paying foreign workers, and more. So, let's dive in and make sense of it all.
Understanding PAYE for Overseas Employees
Most people in the United Kingdom pay income tax through PAYE - the backbone of the UK payroll tax system. It’s the method used to deduct Income Tax and National Insurance contributions (NICs) from your employee's wages or pensions before they receive their payments. This system streamlines UK payroll taxes for employers. Just remember, it's your responsibility to implement it correctly.
Dealing with PAYE taxes and National Insurance contributions for employees working abroad is quite distinct from those working within the UK. It largely depends on where the employee works and how long their assignment abroad will be.
This guide aims to simplify the complex world of PAYE tax and National Insurance contributions for overseas employees, offering employers valuable insights into managing these financial obligations.
Is PAYE Only for Employees?
PAYE isn't exclusive to traditional employees. It applies to a wider group, including self-employed individuals and contractors, as it's the system used in the UK to deduct Income Tax and National Insurance contributions from earnings, regardless of work status.
What Does Self-Employed Mean With PAYE?
Being self-employed means running your own business independently. Self-employed individuals don't use the PAYE system to receive income and have different legal rights and responsibilities compared to employees. They need to inform HMRC promptly about their self-employed status for tax compliance.
What Rights and Obligations Apply to Self-Employed People?
Self-employed individuals mostly act as their own bosses and are not covered by employment law in the same way as employees. They still have protections like health and safety rules and, in some cases, anti-discrimination laws. They will not, however, be given allowances such as statutory sick pay and statutory maternity pay. Their specific rights and responsibilities are outlined in their client contracts.
How Can You Determine Self-Employment Status?
Determining self-employment status can be complex since tax status may not match employment law classification. It's crucial to consider tax and employment law when classifying workers to avoid tax liabilities and penalties. Employers should stay informed about legal distinctions and seek HMRC guidance when needed.
What Are the Different Contractor Statuses Under PAYE?
Contractors under PAYE can have various statuses, including self-employed, worker, or even employee status when hired through agencies. These distinctions impact tax treatment and employment rights, so it's essential for contractors and employers to understand them.
How Can Employers Ensure Compliance with PAYE and Employment Status Regulations?
To stay compliant with PAYE and employment status regulations, employers should create a systematic process for verifying worker status, particularly for self-employed individuals and contractors. Online payroll software can help determine tax-related employment status. When in doubt, employers can seek guidance from HMRC to avoid tax and legal issues arising from misclassification.
How Do You Calculate PAYE Tax for Employees Working Abroad?
When an employee takes on an international job, their UK employer still needs to calculate and deduct PAYE taxes from their earnings. To smooth this process, employers should provide the employee with a letter detailing when they started working abroad, their total pay from the beginning of the tax year to the departure date, and the tax deductions made during that time.
Additionally, if employees spend most of their time abroad for a year or more, they might qualify for full UK tax relief. To start this process, they can fill out form P85 and send it to HMRC to determine the correct tax code.
When an employee is working under a foreign contract, the host country's tax authorities may require tax deductions. Employers must communicate with the Employer Helpline and the relevant foreign tax authorities to understand their responsibilities in both countries. For employees in offshore areas, PAYE taxes are usually handled as usual, with some exceptions that may apply.
What Are the Rules for Calculating National Insurance Contributions?
When it comes to National Insurance contributions for employees working abroad, it can be a bit complicated. It depends on factors like where the employee is going and their situation.
If your employees are heading to certain European countries, there are specific rules to follow. For employees going to countries with which the UK has special agreements, their National Insurance contributions might go to the host country's system instead. We’ll get into these details in a bit.
If your employees temporarily work in countries with these agreements, they can still pay into the UK's National Insurance system. You'll need to apply for a certificate for them to confirm they don't need to pay in the host country.
But if your employees go to countries without these agreements, they'll usually keep paying National Insurance for the first 52 weeks they're abroad.
It might sound complex, but it's crucial to make sure everything is for your employees and your business.
When it comes to employer National Insurance Contributions, there are certain things to remember. The rates you pay depend on which income category you fall into and range from 0% to 13.8%.
You must also pay a 13.8% rate on National Insurance expenses and benefits provided to employees. This rate also applies to certain lump sum payments like redundancy payments.
Working in the EU, Gibraltar, or Switzerland
When your employees work in these areas, they typically pay social security contributions in their host country. However, as their employer, you may still have a responsibility to pay National Insurance (NI) in the UK. To demonstrate that your employees are exempt from social security contributions in their host country while working there temporarily (up to 2 years), you can obtain a certificate from HMRC.
Working in Iceland, Liechtenstein, or Norway
The rules vary depending on whether you're covered by the EEA-EFTA Separation Agreement. If you are covered, the process is similar to working in the EU, and you can acquire a certificate for up to 2 years of temporary work. If you're not covered by this agreement, there are social security agreements to consider. You can still apply for a certificate to pay NI exclusively in the UK, but the specific conditions can differ, so it's advisable to seek guidance from HMRC.
Not Covered by Agreements
In certain situations, neither of these agreements may apply, and your employee may need to pay social security contributions in their host country. During the initial 52 weeks, you might still be required to pay NI in the UK if specific conditions are met.
These conditions include having a UK place of business, UK residency, and being ordinarily resident in the UK. It's essential to communicate with the social security institution in the foreign country to understand their requirements. If the conditions don't apply, you won't need to pay NI in the UK, but voluntary contributions might be an option.
As an employer, it's crucial to stay informed and maintain open communication to ensure compliance in these various employment scenarios.
What Are Modified PAYE Procedures, and How Can They Benefit UK Employers with Overseas Employees?
Employers operating in a global context may opt for HMRC's modified payroll arrangements, which are a flexible part of payroll in the UK. It offers flexibility and convenience in managing overseas employees' financial affairs. These arrangements cater to specific scenarios, such as short-term business visitors, employees on overseas contracts, or tax-equalized workers.
They streamline tax calculations and submissions, providing employers with cost-effective solutions and helping them maintain cash flow. Selecting the most suitable modified payroll scheme depends on the unique circumstances of the employer and their employees.
Employers with agreements for modified PAYE arrangements have specific reporting requirements, including the use of one FPS each month and keeping records for a specific period.
How do I Manage Separate Payrolls for Domestic and Overseas Employees?
When employers maintain separate payrolls for domestic and overseas operations, specific protocols should be followed when employees transition between PAYE schemes. This ensures a smooth and compliant process as employees move between organizational roles.
By delving into this comprehensive guide, employers can understand how to navigate the intricate realm of PAYE tax and National Insurance contributions for their overseas employees, fostering efficient compliance and effective financial management.
How Do I Manage Payroll for Overseas Employees Who Are Coming to Work in the UK?
Before hiring an employee, verify their legal right to work in the UK.
Paying Income Tax
For employees coming to work in the UK from abroad, whether on a temporary or permanent basis, employers must operate PAYE tax. To stay on top of your tax obligations, keep the following in mind.
Personal Allowance
Most of your employees can claim a personal allowance, which means they won't pay income tax on the first GBP 12,570 they earn in the tax year 2024/25. However, this may not apply to employees with very high incomes or non-UK residents.
Income Tax Bands
Different tax rates apply to different income levels. For instance, income between 12,571 and 14,876 GBP is taxed at a starter rate of 20%. Income between 75.001 and 125,140 GBP falls into the advanced rate of 40%, while income over 125,140 GBP is taxed at a top rate of 48%.
Special Rules
Pay attention to special rules for certain types of income. For savings, there's a starting rate of 0% on the first GBP 5,000 of savings income, but this might not apply if your employees have other income above this limit. Dividends are taxed at various rates, with a dividend allowance of GBP 1,000 (0% tax rate) for 2023/24, reduced to GBP 500 from April 6, 2024.
Seconded Employees
Even if the employee remains employed by an overseas business and isn't directly paid by the UK employer, the UK employer is still responsible for recording and reporting their earnings and PAYE deductions to HMRC. These employees are referred to as 'seconded employees.'
When employees from another country temporarily work in the UK for a UK-based employer but are still employed by their overseas company, it's called secondment. The UK employer has to handle their tax (PAYE), but the tax codes and payroll records rules are a bit different in this situation.
What to Include in Payroll Records for Seconded Employees
Specific information is required for seconded employees in the payroll records, and it depends on various factors, including the employee's present circumstances and the presence of certain schemes.
National Insurance Contributions
Different rules apply to National Insurance contributions based on an employee's origin and specific circumstances, including whether they have certain documents or agreements in place.
As an employer, you must deduct mandatory National Insurance contributions from employees who meet specific criteria. This includes employees who earn over £242 per week from one job or self-employed individuals making a profit of more than £12,570 a year.
Some employees may not meet these income thresholds but still qualify for certain benefits and make pension contributions. For example, those earning between £123 and £242 a week from one job or self-employed individuals with profits between £6,725 and £12,570 a year. Their contributions are considered paid to protect their National Insurance record. Remember that they’re separate from your workplace pension scheme and benefits package, which you can adapt to stand out from the crowd.
Taxable Benefits
For employers in the UK, it's important to understand the taxation status of certain state benefits that your employees may receive. While employers aren't responsible for paying taxes on these benefits, being informed can help you support your employees in managing their finances. Here are some common taxable state benefits:
- Bereavement Allowance (previously Widow’s pension)
- Carer’s Allowance
- contribution-based Employment and Support Allowance (ESA)
- Incapacity Benefit (from the 29th week you get it)
- Jobseeker’s Allowance (JSA)
- pensions paid by the Industrial Death Benefit scheme
- the State Pension
- Widowed Parent’s Allowance
Information Needed from New Employees
When hiring an employee from abroad who doesn't possess a form P45, you'll need their full name, gender, date of birth, complete address (including postcode), and their National Insurance number if available. This information is crucial for calculating deductions from the employee's pay.
Agreement to Operate PAYE for UK Work
Employers can apply to operate PAYE on an employee's earnings for work performed in the UK under certain conditions, such as when the employee is not a UK resident and works both inside and outside the UK.
Payments to Non-UK Bank Accounts
Payments into overseas bank accounts need to be reported correctly to ensure compliance with tax and National Insurance contributions.
Work Done in and Outside the UK
Special rules apply to employees who are not UK residents or who are entitled to overseas workday relief. Employers can apply for directions from HMRC to operate PAYE only on the portion of an employee's earnings related to work in the UK.
Short-Term Business Visitors
Employers must operate PAYE on earnings for short-term business visitors unless there is a Short-Term Business Visitor Arrangement in place. If employees no longer meet the EP Appendix 4 conditions, employers must include their earnings in the next FPS after the change.
What Are the Best Practices and Tips for Streamlining International Payroll?
When choosing a global payroll solution, asking the right questions is essential. Firstly, ensure the provider is trustworthy and can seamlessly integrate with your HR systems. Check if they cover all your markets and offer cloud-based accessibility for flexibility.
Confirm their ability to manage payroll processes uniformly across all markets and provide the necessary features for your current and future needs. Compliance with local laws is crucial, and flexibility in handling different payment scenarios is advantageous.
Employee self-service options can improve efficiency, and accessible expert support is a must. These questions will guide you in selecting a dependable global payroll solution that suits your business.
Global Payroll Vendor for UK Integration
Integrating employees from different countries into the UK payroll can be tricky, but using a global payroll vendor makes it easier. This vendor simplifies the process, ensures that everyone's payroll is handled the same way, and follows all the UK rules.
It's like having a reliable partner who keeps things consistent and up-to-date with UK payroll laws. This helps avoid problems and ensures everyone gets paid correctly, no matter where they work.
Local vs. Global Approach
When you're bringing in employees from other countries into your payroll system, you'll have to decide if you want to manage their pay locally or globally. If you go with local processing, you have more control and can customize things to fit each region's rules. However, it can also lead to differences and inconsistencies in handling payroll. So, it's like balancing between meeting local needs and ensuring things are the same across the board. Finding that balance is essential for ensuring everyone gets paid correctly and on time while following the overall payroll rules of your company.
Payroll Aggregators and MCPO for International Teams
Payroll aggregators serve as helpful middlemen, connecting payroll data from different countries. This makes them a practical choice when it comes to managing international teams. They simplify the complex task of bringing together payroll information from various places, ensuring a more straightforward and unified approach.
For smaller employee populations in countries that aren't part of the main payroll system, Multicountry Payroll Outsourcing (MCPO) is a cost-effective solution. It's like having a specialist handle payroll for those smaller markets, efficiently managing payroll without needing a full-scale, in-house system.
Employer of Record
Employer of Record (EOR) services, like Borderless, simplify life for UK employers with overseas workers. They offer legal know-how, handling complex international payroll laws and compliance. This ensures payroll follows local rules, reducing legal risks. EORs also streamline payroll tasks like taxes and benefits, saving time and ensuring accuracy.
They often provide faster payments, keeping employees happy. Plus, EORs can create tailored benefits packages for each country, making you an attractive employer. Importantly, EORs save money by eliminating the need for legal setups abroad. They also handle compliance and legal issues, giving UK employers peace of mind while focusing on their business.
Choose Borderless
Selecting the right payroll solution is a critical decision for your business, and when it comes to managing your global workforce efficiently and seamlessly, choosing Borderless is the smart choice.
Multiple Payment Methods
Borderless offers different payment options for overseas employees so they can receive their salaries however they prefer. This helps minimize payment problems and increases overall satisfaction.
Flexible Invoicing Options
Borderless offers flexible invoicing options, making financial transactions easier for UK employers. You can pick the best invoicing method that suits you, reducing administrative work and streamlining your finances.
Swift Payroll Processing
At Borderless, we prioritize fast and efficient payroll processing. This makes paying foreign workers easy by ensuring they receive their payments on time, every time.
All-In-One Platform
Borderless doesn't just handle payroll; we also take care of HR and compliance in one place. This makes things more accessible and efficient for UK employers, as you don't have to deal with multiple systems, simplifying global payroll management.
Customized Benefits Packages
Borderless has the capability to design benefits packages tailored to the specific needs and preferences of overseas employees. This personalized approach enhances your attractiveness as an employer and fosters employee loyalty.
Zero Upfront Costs
UK employers can leverage Borderless services without incurring upfront expenses, making it a cost-effective solution for managing payroll for overseas workers. This allows companies to allocate resources more efficiently and invest in other critical areas of their business.
Expert Support
Borderless goes the extra mile by offering in-app support. This means that both UK employers and overseas employees can quickly get help whenever they need it, making sure that any questions or problems are resolved promptly.
To sum it up, Borderless works as a partner for employers with overseas employees, making payroll in the UK hassle-free. We leverage our legal expertise and advanced tools to simplify global payroll, enabling UK employers to concentrate on their core business while ensuring employee satisfaction and global compliance. Get in touch today.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
