Hamilton Pratt

Employee Taxation

What are the tax rules for individual workers?

The liability to UK tax of foreign nationals working in the UK will depend upon whether they are treated as resident and ordinarily resident in the UK.  UK residents must pay income tax on all the "emoluments" of their employment. Emoluments include any salary, tips, bonus payments and benefits in kind.  UK residents are however entitled to a personal allowance, being the amount which can be earned in each tax year free of tax.

A person who comes to the UK in connection with his employment for a period of up to two years will only be regarded as resident in the tax years in which he or she spends 183 days or more in the UK. A tax year runs from 6 April in one year to 5 April in the next year.  A person who comes to the UK in connection with his or her employment for a period of at least two years will be resident here from the date of his arrival in the UK.

An individual whose intended stay in the UK is less than three years will be regarded as not "ordinarily resident" in the UK.  The individual's status would change to ordinarily resident in the UK on the earliest of:-

  • the beginning of the tax year after that in which the third anniversary of his arrival in the UK falls;
  • the beginning of the tax year in which the individual's intention changes to an intention to stay in the UK for more than three years from the original date of arrival; and
  • the date of the arrival in the UK if he has purchased accommodation or purchases it in the tax year of arrival for his use here or leases a property for a period of three years or more, or the beginning of the tax year in which such accommodation becomes available.

Foreign nationals who work in the UK but do not become resident here are charged to UK tax only on their emoluments for duties performed in the UK.  There may be no UK tax liability if the duties performed in the UK are incidental to duties performed abroad.

Foreign nationals who become resident but not ordinarily resident in the UK are charged to tax on emoluments for duties performed here and remittances to the UK of emoluments for duties performed elsewhere.

Employees who are both resident and ordinarily resident in the UK will be charged to tax on all the emoluments of their employment, whether arising in the UK or not and whether or not remitted to the UK unless the duties of their employment are performed wholly abroad.

What are the employer's obligations?

An employer is required to deduct income tax at source from salary payments made to an employee (whether or not UK resident) under the pay as you earn (PAYE) system. The employer also has an obligation to report to the Inland Revenue any benefits in kind provided for the benefit of the employee.

Employees and employers are liable to pay national insurance contributions, calculated by reference to salary payments made to employees. The employer is required to deduct the employee's contributions from his salary under the PAYE system.

PAYE and national insurance contributions can apply in respect of some benefits in kind, including certain share options unless the arrangements fall within Inland Revenue approved schemes.