The Chancellor has announced changes to the income tax reliefs available to employees who carry out some or all of their duties overseas. While those changes will simplify the rules, employers and employees will need to consider the implications of the changes carefully as there will be winners and losers.
Like many countries, the UK has a favourable tax regime to encourage international investment and talent to the UK. The current regime has long been a source of political contention as it enables individuals who are not domiciled in the UK (broadly non-UK citizens who do not consider the UK to be their permanent home known as non-doms), even if they are long term UK tax residents, to keep their foreign income and gains outside of the UK tax net, provided they do not remit the income and gains to the UK.
The Chancellor has now confirmed that the Foreign Income and Gains regime (FIG) proposed by the previous government will be implemented with effect from 6 April 2025. However, there are some significant differences in the rules proposed by the Chancellor which will affect the reliefs available for internationally mobile employees.
How will FIG work?
Under FIG, individuals who become tax resident in the UK on or after 6 April 2025 and who have not been UK-resident in the previous ten tax years will not pay income tax or CGT on any foreign (non-UK) income or gains arising in their first four years of residence. This is the case even if the individual remits (i.e. pays, brings in or enjoys) these funds to the UK. During the first four years of UK residence, the individual will only pay UK tax on their UK income and gains.
Individuals will need to make a claim to use FIG for every tax year that they want (and are eligible) to use it. If an individual chooses to be taxed under FIG, they will lose any entitlement to personal allowances and the capital gains tax annual exempt amount.
What's the effect on employment income?
UK tax resident non-doms who are working wholly overseas for a non-UK employer are currently able to keep their employment income outside of UK tax provided that the income is paid overseas and is not remitted to the UK. This relief will be abolished.
UK tax resident non-doms who are working partly in the UK and partly overseas or who are working wholly overseas for a UK employer are currently able to claim overseas work day relief ("OWR"). OWR provides an exemption from UK income tax on the income an employee earns for those days on which they are physically working overseas for the first three years of tax residence in the UK. This is provided that the income is paid overseas and is not remitted to the UK.
Under FIG, the period for which OWR is available will be extended to four years (so that an employee who is eligible for and claims FIG for a UK tax year will also be eligible for and able to claim OWR on their foreign employment income for that tax year). OWR will now apply irrespective of whether the income is paid in or remitted to the UK.
However, there will be a significant restriction. OWR relief will now be restricted to the lower of £300,000 or 30% of employment income for each tax year irrespective of the number of days that the employee works overseas.
In addition, the period for which employees are exempt from tax on travel expenses paid for by their employer when they come to work in the UK between their home country and the UK, will be reduced from the current five years to four years.
What's the PAYE position?
Employers with a presence in the UK are generally obliged to apply PAYE on 100% of an employee's employment earnings, even where some of the duties are performed abroad. However, where an employee benefits from OWR, an employer can apply for a Section 690 direction to only operate PAYE on its best estimate of the employee's earnings for their UK workdays ("UK Income"). If it transpires that the estimate is too low or too high, the employee must pay any additional tax due or claim a refund via self-assessment.
Under the current rules, employers must wait until the Section 690 direction is issued before only operating PAYE on the UK Income. With effect from 6 April 2025, the employer will now be able to operate the Section 690 direction – subject to the restriction described above – as soon as they receive the auto-acknowledgement of their application.
Overall, these measures provide welcome simplification. However, those internationally mobile employees who are well-paid and/or carry out substantial overseas duties are likely to be worse off and may look to their employers for compensation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.