UK PAYE obligations for overseas companies

Employees may be seconded to the UK temporarily, relocated permanently, or may live overseas but travel frequently to the UK for work purposes. Regardless of the working arrangement, there are several UK payroll and statutory employment obligations that must be addressed.

This article provides a high-level overview of common compliance and payroll aspects that non-UK employers should consider. It is intended to assist overseas employers who are new to the UK system or act as a helpful reminder for those already familiar with UK requirements.

Overseas employers have permanent establishment in the UK

To pay the tax and National Insurance due to HMRC, we have advised that overseas employers should set up a UK payroll if it is deemed to have a Permanent Establishment (PE) in the UK. Under UK law, a PE can be established in two ways:

1. A fixed place of business in the UK.
2. Someone acting on behalf of the overseas company who has the authority to conduct business on its behalf (e.g., a director who negotiates and signs sales contracts for the company).

In recent times, employees’ homes are increasingly being considered as fixed places of business. As a result, many overseas companies are setting up UK payrolls to avoid unintentionally exposing themselves to potential PAYE penalties and interest, especially when they have staff working from home in the UK.

Overseas employers does not have permanent establishment in the UK

If the employer does not have a Permanent Establishment (PE) in the UK, they are not required to deduct tax and Class 1 National Insurance from the wages of UK-resident employees. While this may seem like good news for employees, in practice, it can create significant issues, as the responsibility for paying these taxes then falls on the employee.

HMRC offers “direct collection” schemes, allowing employees to operate PAYE on their own salary. However, these schemes can be complicated to set up and even more difficult to manage, especially for employees with little or no financial expertise. Additionally, if the employee makes a mistake or is late with payments, they could face penalties or interest charges. These “direct collection” schemes are not enforceable by HMRC, which is why many employees choose not to use them. Instead, they often register with HMRC under Self-Assessment and pay tax on their earnings that way.

As a result, many overseas employers opt to set up UK payrolls, even when they are not strictly required to do so, in order to prevent the tax compliance burden from falling on their employees.

PAYE for overseas employers with no UK presence

Overseas employers without a formal UK presence often wonder about their obligations under the PAYE system. While these businesses may not have a physical office, subsidiary, or permanent establishment in the UK, they could still be subject to PAYE requirements depending on the nature of their operations and the arrangements for their employees.

For example, if employees are working in the UK but are hired directly by an overseas employer, PAYE may still apply. This typically occurs when employees perform duties in the UK that generate taxable income under UK law.

In such cases, overseas employers must assess their tax presence and register with HMRC if required. Even without a physical presence in the UK, the employer is responsible for ensuring that proper income tax and National Insurance deductions are made to remain compliant with UK regulations.

Employers should also consider potential liabilities under offshore employee agency regulations, as these may impose PAYE obligations even without a UK presence. Seeking professional advice is highly recommended to determine specific obligations and avoid non-compliance risks.