Most UK resident employers who assign employees to work overseas will have an obligation to deduct overseas wage tax from their employees as well as UK PAYE. To avoid having to deduct both UK PAYE and overseas tax from their employees’ salaries, many employers seek permission from H M Revenue & Customs (“HMRC”) to operate an Appendix 5 Net of Tax Credit Scheme.
This scheme simplifies matters for employees and avoids them having to pay both UK PAYE and overseas wage tax on the same income. Although a Net of Tax Credit Scheme is a very effective and useful tool, there is a lot of administration required by the employer to ensure the scheme works smoothly.
The administrative steps are set out by HMRC in supporting documentation when employers are granted approval to operate the scheme. If employers do not follow all the steps, employees will invariably get demands for underpaid tax and the employer may themselves face a PAYE enquiry from HMRC.
The key steps, which employers should follow when operating a Net of Tax Credit Scheme are set out below:
- “Net” UK tax figures after foreign tax has been offset should be filed on the Full Payment Submission (“FPS”). The foreign tax should be recorded separately.
- HMRC should be advised regularly as to which employees are part of a Net of Tax Credit Scheme.
- At the end of the UK tax year, a schedule should be sent to HMRC showing (for each employee) the amount of income which was double taxed, the total foreign tax paid, the total foreign tax set-off against PAYE and the Net UK PAYE deducted.
- At the end of the UK tax year, the P60 should show (in red text) the amount of foreign tax paid and the amount offset against PAYE. Alternatively, this information should be given to each employee on a separate schedule. Either way, the P60 should show net PAYE after foreign tax has been deducted.
- In addition, under the scheme rules, employers have to advise HMRC if they know that any employee has received a refund of foreign tax. Employees are also obliged to advise HMRC if they receive a refund of foreign tax. In this type of scenario, the employer should consider whether an overseas authorisation for all employees is appropriate.
- Finally, overseas wage tax can often include a contribution towards overseas National Insurance Contributions. Any such payments must not be offset against PAYE. Furthermore, the UK and overseas National Insurance position should also be considered, rather than being the “forgotten tax”.
If you require any support in managing your Net of Tax Credit Scheme, please do not hesitate to contact Karen Groat (Karen.Groat@aab.uk) or your usual AAB contact.