Cross-Border Payroll: How to Pay Overseas Staff Compliantly

Four ways to pay staff who work overseas

Before you touch a payslip, you need to decide how the person is engaged and where their pay is administered. There are four common structures, and the right one depends on how long they will be abroad, how many people you have in that country, and how much compliance risk you are willing to carry directly.

The choice is not purely a payroll decision. Setting up a local entity or using an employer of record affects your corporate footprint, your permanent establishment exposure, and your ongoing running costs. Engaging someone as a contractor removes payroll obligations but only works where the working relationship is genuinely one of self-employment rather than disguised employment. Keeping someone on UK payroll can be the simplest route for short assignments, and HMRC provides modified arrangements for exactly this situation.

The table below compares the four routes. Read the compliance column carefully, because that is where the hidden work sits.

PAYE income tax when an employee works abroad

The starting point is clear. HMRC's guidance states that you must continue to calculate and deduct PAYE Income Tax from all payments made to employees who work abroad. Moving someone overseas does not automatically release you from operating UK PAYE on their earnings.

When the employee leaves to work abroad, you should give them a letter showing their departure date, their gross pay from the start of the tax year to the departure date, and the tax deducted in that period. This gives the employee and HMRC the record needed to work out the position correctly.

Where an employee is going to spend most of their time abroad for a year or more, they may be entitled to full UK tax relief on their employment income. To get the right tax code applied, the employee completes form P85 and sends it to HMRC, which will then confirm the tax code you should use. Until HMRC confirms a change, you keep operating the code you have.

None of this removes the possibility that the country where the person is working will also tax the same earnings. That is where modified arrangements and double taxation relief, covered further down, become relevant.

National Insurance and the 52-week rule

National Insurance follows a different logic from income tax, and it turns on social security rules rather than tax residence. HMRC's guidance sets out a specific rule for the first 52 weeks an employee is abroad.

You must continue to calculate and deduct National Insurance for the first 52 weeks an employee works abroad if all of the following conditions are met: the employee is working abroad temporarily, your business has a place of business in the UK, the employee is ordinarily resident in the UK, and the employee was living in the UK immediately before starting the work abroad. If all four apply, UK National Insurance continues to be due on their earnings for that period.

Where the employee holds a certificate of coverage, also referred to as a PDA1 or an A1, confirming that they only need to pay UK National Insurance contributions, you calculate and deduct National Insurance on their earnings as if the work had been done in the UK. The certificate is your authority to keep the person inside the UK system and out of the local one.

This 52-week rule and the certificate of coverage sit at the centre of cross-border payroll. Get the social security position confirmed early, because it determines which country's contributions you deduct from day one.

Social security coordination and certificates of coverage

Social security is coordinated between countries through agreements. HMRC describes these as social security agreements, sometimes called reciprocal agreements or double contribution conventions. Their purpose is to stop a worker paying contributions in two countries at once and to decide which country's system applies.

If your employee works in a country that has a social security agreement with the UK, they will usually pay social security contributions in that country rather than UK National Insurance. The exception is where they obtain a certificate of coverage confirming they remain liable in the UK. To apply for that certificate for a country with a social security agreement, HMRC provides form CA9107, and applications can be made by employers, employees, self-employed people or their agents.

The UK lists social security agreements with a defined set of countries. HMRC names these as Barbados, Bermuda, Canada, Chile, Guernsey, India, Israel, Jamaica, Japan, Jersey, Mauritius, the Philippines, the Republics of former Yugoslavia, South Korea, Turkey and the USA. For the EU, Gibraltar, Iceland, Liechtenstein, Norway and Switzerland, a separate set of rules and an interactive application tool apply rather than form CA9107.

For workers going to the EU, Gibraltar, Iceland, Liechtenstein, Norway or Switzerland, you will usually pay social security in the country where the person is working. You only pay National Insurance in the UK if HMRC has issued a certificate of coverage, also referred to as a PDA1. Where the detached worker provisions apply, a temporary posting can be covered for up to two years.

Modified PAYE and double taxation relief

When an employee is working abroad and their pay is taxed both in the UK and in the other country, you can face the problem of deducting two lots of tax from the same earnings. HMRC provides modified PAYE arrangements to manage this for internationally mobile employees.

The arrangement known as EP Appendix 5 lets you provisionally give employees relief for double taxation where they must pay both UK tax and foreign tax on the same payments of earnings. In practice, it allows you to set the foreign tax off against the UK tax due under PAYE. HMRC's guidance explains that you can operate this where you send an employee to work abroad, you deduct UK PAYE using their UK tax code, and you need to deduct foreign tax from their pay.

The relief is capped. The employee can only claim relief up to the amount of Income Tax they would have been liable to pay in the UK, so Appendix 5 reduces the UK deduction but does not refund foreign tax beyond that limit. To operate it, you apply to HMRC to use foreign tax credit relief, provide quarterly updates, and report the relief given at the end of the tax year. Once HMRC approves the arrangement for one employee in a country, you can extend it to other employees you send to that same country, provided you include the details in your quarterly updates.

A separate arrangement, EP Appendix 6, covers tax-equalised employees, typically where an employer agrees to meet a foreign national's UK tax liability so the employee receives a specified amount of net earnings. Beyond payroll, employees can claim Foreign Tax Credit Relief when they report overseas income in their own tax return. How much they get back depends on the UK's double-taxation agreement with the relevant country, and they may get back less if the agreement sets a smaller amount or if the income would have been taxed at a lower rate in the UK.

Currency, payment rails and getting money to the worker

Once the tax and social security treatment is settled, you still have to move the money to the person in a currency they can spend. This is a practical payments question, and the choices you make affect both cost and reliability.

If you run a local entity or use an employer of record, pay is usually delivered through local payroll in local currency, so the foreign exchange and payment rail are handled within that structure. If you keep someone on UK payroll while they work abroad, you will need to decide whether you pay into a UK account they still hold or convert to local currency and send it internationally. Cross-border transfers carry two costs: the visible transfer fee and a less visible margin built into the exchange rate, so compare providers on the total landed amount rather than the headline fee.

Whichever route you use, keep the gross pay, deductions and the sterling amounts clearly recorded for HMRC, and make sure the employee understands the timing. International transfers can take longer to arrive than a domestic payment, so build that into your pay dates. A dedicated payments capability such as Nasara Connect's Pay tools can help you keep records consistent across currencies while you run payroll centrally, and you can request a demo to see how it fits your process.

Setting up an overseas payroll: a step-by-step approach

Cross-border payroll is manageable when you take it in order. The most common failures come from moving someone abroad first and asking the tax questions afterwards. Work through the position before the assignment starts, confirm the social security treatment in writing, and only then decide how you will deliver the pay.

The sequence below reflects the order in which HMRC's rules apply. Confirm the tax and National Insurance position, secure any certificate of coverage, choose the structure, and put the payment mechanics in place, working through each step before the assignment begins.

Conclusion

Paying overseas staff well is a matter of sequence and evidence. Decide how the person is engaged, confirm whether UK PAYE continues, work through the National Insurance tests and the 52-week rule, secure a certificate of coverage where a social security agreement applies, and address double taxation before you run the first payslip. Each of these steps rests on a specific HMRC rule, and each has a clear form or arrangement behind it.

The structure you choose, whether a local entity, an employer of record, a contractor engagement or UK payroll with modified arrangements, shapes everything that follows. Get advice where the position is finely balanced, keep clean records in sterling, and confirm the social security treatment in writing before the assignment begins. Approached in the right order, cross-border payroll becomes a repeatable process rather than a source of surprises.

Frequently asked questions