As a general rule, a UK resident is taxable on his worldwide income on an arising basis. This includes all worldwide employments, regardless of where duties are performed.
Non-UK domiciled individuals
However, there is an exception to this rule for non-UK domiciled individuals who can elect to be taxed on the “remittance basis”. Where a claim for the remittance basis is made, non-UK earnings are not subject to UK taxation, provided that they are paid into a non-UK bank account and not subsequently remitted to the UK. For those destined to return to their home country, this provides the ultimate in deferrals.
Overseas Workday Relief
A specific statutory relief, known as Overseas Workday Relief (OWR), is available for non-UK domiciled individuals who take up residence in the UK and have not been resident in the previous three tax years. The relief classifies earnings in respect of “overseas workdays” as foreign earnings, so they are not taxed unless remitted to the UK (provided that the individual claims the remittance basis of taxation in the applicable tax years). The relief operates for the first three years of UK tax residence only.
What constitutes an overseas workday?
Total earnings are proportioned into UK and non-UK earnings on a day basis. An overseas workday is one spent outside the UK substantially performing the duties of employment. It would include, for instance, a day where a flight was taken early in the morning to work overseas and most of the day was spent overseas. HMRC do not accept that a departure from the UK late in the day qualifies as an overseas workday. Holidays, weekends and other non-work days are not counted.
Under the “special mixed fund” rules, HMRC allows the entire salary to be paid into a single non-UK bank account without triggering the onerous “mixed fund rules”. Under these beneficial rules, amounts remitted to the UK are deemed to come first from UK earnings, so no remittances of earnings from non-UK workdays are to be made until the UK earnings are exhausted.
Without separate negotiation, the UK employer will be required to operate PAYE on the entire salary, with any repayment for non-UK workdays being claimed when the individual files a UK tax return later. Alternatively, an employer can apply to HMRC to operate a moderated payroll for the individual concerned. HMRC may allow the employer to deduct tax only for anticipated UK workdays if the number can be reasonably ascertained.
Mr Blanchet was born in France to French parents and therefore considers himself non-UK domiciled. He moves to the UK for the first time on 6 April 2021 to work for an international investment management business. As part of his employment duties, he will spend 100 workdays out of a total available workdays of 220 overseas and earn an annual salary of £250,000 per year.
Since Mr Blanchet has not been resident in the UK in the past three tax years, he can claim OWR in 2021/22, 2022/23 and 2023/24. After that he will no longer qualify for the relief unless he spends three years outside the UK in order to “restart the clock”.
In 2021/22 the entire salary is paid into a non-UK bank account. The amount assessable on an arising basis (UK workdays) is £136,136 (120/220 x £250,000). This is subject to UK tax in full whether it is remitted to the UK or not. However, the balance applying to non-UK workdays of £113,864 remains outside the scope of UK taxation, providing it is not subsequently remitted to the UK.
Benefits of Overseas Workday Relief
Overseas Workday Relief is a particularly beneficial relief for non-UK domiciled individuals who take up residence in the UK and commence employment in the UK, but will spend a reasonable number of days working overseas each year.
In addition to providing tax compliance and advisory services to non-UK domiciled individuals, the Wheelhouse Advisors team has significant experience in successfully obtaining agreement from HMRC to enable UK based employers to operate moderated payrolls for non-UK domiciled employees working overseas and eligible to claim OWR.
For specific advice regarding overseas workday relief please contact the Private Client Tax team at Wheelhouse Advisors.