How is employment income taxed when an employee works in multiple countries?

Employment income is taxed in the country of residence (on worldwide income) and the country where duties are performed (on workday income). Treaties typically give primary taxing rights to the residence country, with the workday country having rights only if the employee spends 183+ days there. When an employee works in more than one country, both countries may have taxing rights: (1) Country of residence — taxes the employee on worldwide employment income. (2) Country of work — taxes the employee on employment income relating to workdays performed in that country. Double taxation treaties typically allocate taxing rights as follows: (a) The country of residence has primary taxing rights on all employment income. (b) The country where the work is performed has taxing rights only if ALL three conditions are met: (i) the employee is present in that country for 183+ days in any 12-month period, (ii) the employment income is not borne by an employer resident in that country (i.e., not a permanent establishment), and (iii) the income is not borne by a permanent establishment of the employer in that country. If any condition is not met, only the country of residence can tax the income. The UK taxes employment income based on where the duties are performed — UK workdays are subject to UK PAYE regardless of the employee's residence. Overseas workdays may be subject to overseas tax, and the employee may need to claim treaty relief or double taxation relief to avoid double taxation. Relevant legislation: ITEPA 2003, Sections 14-15 (employment income — UK workdays); OECD Model Convention, Article 15 (employment income); specific UK bilateral treaties. Example: A French resident employee works for a French company but spends 100 days in the UK during a 12-month period. Under the UK-France treaty, the UK can only tax the employment income if the employee spends 183+ days in the UK (they don't), so the UK cannot tax the income. The employee is taxed only in France. If they spent 200 days in the UK, the UK could tax the UK workday portion. Common mistake: Assuming that the 183-day rule applies to each tax year separately. Under most modern treaties (based on the OECD Model), the 183-day period is measured over any 12-month period, not a single tax year.

What is a split payroll arrangement?

A split payroll arrangement allocates PAYE between UK and overseas workdays. The employer operates PAYE on the UK portion and pays the overseas portion gross (subject to overseas tax). It requires HMRC agreement and detailed workday records. A split payroll arrangement is used when an employee works partly in the UK and partly overseas. Under the arrangement: (1) UK workdays — the employer operates PAYE on the proportion of employment income relating to UK workdays. (2) Overseas workdays — the employer pays the overseas portion gross (without UK PAYE). The overseas portion may be subject to tax in the overseas country, and the employee may need to file an overseas tax return. (3) HMRC agreement — the split payroll arrangement must be agreed with HMRC (typically through a net deduction arrangement or Appendix 6 arrangement). (4) Workday records — the employer must keep detailed records of the employee's workdays by location (UK vs overseas), including travel days, training days, and leave. (5) Annual reconciliation — at the end of the tax year, the employer reconciles the PAYE deducted against the actual UK workday proportion, and any over- or under-deduction is adjusted. Split payroll arrangements are commonly used for internationally mobile employees, such as executives who split their time between the UK and an overseas office. Relevant legislation: ITEPA 2003, Sections 686-690 (PAYE — modified arrangements); Income Tax (Pay As You Earn) Regulations 2003, Schedule A1 (split payroll). Example: An executive earns £300,000 per year and works 150 days in the UK and 100 days overseas (60% UK, 40% overseas). Under a split payroll arrangement, the employer operates PAYE on £180,000 (60% of £300,000) and pays £120,000 (40%) gross. The executive may need to file an overseas tax return on the £120,000. Common mistake: Not keeping accurate workday records. HMRC can request evidence of the workday split for up to 6 years, and without records, the split payroll arrangement may be challenged and the full amount subject to UK PAYE.

What is the Short-Term Business Visitor (STBV) agreement?

The STBV agreement allows UK employers to avoid operating PAYE for overseas employees who visit the UK for short periods (up to 183 days). The employer applies to HMRC annually and reports each visitor's UK days. If conditions are met, no UK PAYE is operated. The Short-Term Business Visitor (STBV) agreement is an arrangement between a UK employer and HMRC that simplifies PAYE for overseas employees who visit the UK for short periods. How it works: (1) Application — the employer applies to HMRC at the start of the tax year (by 19 April) for a STBV arrangement, listing the overseas employees who are expected to visit the UK. (2) Conditions — for each visitor, the following conditions must be met: (a) the employee is not UK resident, (b) the employee performs duties for an overseas employer (or a UK employer that is part of a group with an overseas employer), (c) the employee spends fewer than 183 days in the UK in any 12-month period, and (d) the employment income is not borne by a UK permanent establishment. (3) Reporting — the employer reports each visitor's UK days to HMRC (typically by 31 January after the end of the tax year). (4) No PAYE — if the conditions are met, no UK PAYE is operated on the visitor's UK workday income. (5) Overstay — if a visitor exceeds 183 UK days, the arrangement may be voided, and PAYE may be due on the UK workday income from the start of the tax year. The STBV arrangement significantly reduces the administrative burden for employers with internationally mobile employees who visit the UK briefly. Relevant legislation: ITEPA 2003, Section 689 (modified PAYE for STBV); Income Tax (Pay As You Earn) Regulations 2003, Schedule A1 (STBV arrangement); HMRC Appendix 6 guidance. Example: A US company sends 5 employees to the UK for short project work during the tax year. None of the employees spends more than 60 days in the UK. The UK employer applies for a STBV arrangement at the start of the year. At year-end, it reports the UK days for each employee. No UK PAYE is operated, as all employees met the conditions (non-resident, under 183 days, income not borne by UK PE). Common mistake: Not monitoring whether a visitor exceeds 183 UK days. If the threshold is exceeded, the STBV arrangement may be voided, and PAYE may be due retroactively from the start of the tax year.

What are the employer reporting obligations for internationally mobile employees?

Employers must file annual reports for modified PAYE arrangements (STBV, net deduction), report benefits on Form P11D, submit Appendix 6 arrangements, and keep detailed records of workdays and payments. Non-compliance can result in penalties. UK employers with internationally mobile employees have enhanced reporting obligations: (1) Modified PAYE arrangements — if the employer operates a modified PAYE arrangement (e.g., STBV agreement, net deduction arrangement), they must file an annual report with HMRC, typically by 31 January after the end of the tax year. The report details each employee's UK days, overseas days, employment income, and PAYE deducted. (2) Appendix 6 — the employer must submit an Appendix 6 arrangement to HMRC at the start of each tax year, listing the employees covered by the modified PAYE arrangement and the terms of the arrangement. (3) Form P11D — benefits in kind for internationally mobile employees must be reported on Form P11D (or through payrolling benefits), including any benefits that are apportioned between UK and overseas duties. (4) Record-keeping — the employer must keep detailed records of: (a) each employee's travel dates and locations, (b) the workday split (UK vs overseas), (c) the employment income and PAYE deducted, (d) benefits in kind, and (e) any treaty relief claimed. Records must be kept for at least 6 years. (5) Non-compliance — failing to file the required reports or keep adequate records can result in penalties (up to £3,000 per employee), interest, and PAYE liabilities being transferred to the employer. Relevant legislation: ITEPA 2003, Sections 686-690 (PAYE — modified arrangements); Income Tax (Pay As You Earn) Regulations 2003, Schedule A1 (reporting); ITEPA 2003, Section 9 (Form P11D). Example: A UK employer operates a STBV arrangement for 10 overseas visitors. It must submit an Appendix 6 at the start of the tax year, keep records of each visitor's UK days, and file an annual report by 31 January. It must also report any benefits in kind (e.g., accommodation, travel) on Form P11D for each visitor. If the employer fails to file the annual report, it may face penalties of up to £3,000 per employee. Common mistake: Not filing the annual report for the modified PAYE arrangement. The report is required even if no PAYE was deducted (e.g., all visitors met the STBV conditions). Failing to file can result in penalties.

How does treaty relief work for cross-border employment income?

Treaties allocate taxing rights for employment income. The residence country has primary rights, and the workday country can tax only if the 183-day threshold is met. Relief is typically given through exemption (in the workday country) or credit (in the residence country). Double taxation treaties allocate taxing rights for employment income and provide relief from double taxation. The standard treaty provision (OECD Model, Article 15) works as follows: (1) Residence country — the employee's country of residence has primary taxing rights on all employment income (worldwide). (2) Workday country — the country where the work is performed can tax the employment income relating to workdays in that country, but ONLY if ALL three conditions are met: (a) the employee is present in that country for 183+ days in any 12-month period, (b) the employment income is not borne by an employer resident in that country, and (c) the income is not borne by a permanent establishment of the employer in that country. (3) Relief methods — if both countries tax the income, double taxation relief is provided: (a) Exemption method — the workday country exempts the income (if the 183-day threshold is not met or the treaty provides for exemption). (b) Credit method — the residence country gives a credit for the tax paid in the workday country. (4) Specific treaty provisions — some treaties have special provisions for government service, directors' fees, artists and sportsmen, and other specific types of employment. The employee should check the specific treaty between the UK and the other country to determine the taxing rights and relief method. Relevant legislation: OECD Model Convention, Article 15 (employment income); specific UK bilateral treaties; TIOPA 2010, Sections 2-9 (double taxation relief). Example: A UK resident employee works 200 days in Germany and 100 days in the UK. Under the UK-Germany treaty, Germany can tax the German workday income (the employee spent 183+ days in Germany). The UK gives a credit for the German tax, reducing the UK tax on the German workday income. The UK workday income is taxed only in the UK (the employee is UK resident, and the 183-day test for UK workdays is met from the UK side). Common mistake: Assuming that the 183-day threshold is the only test. Even if the employee spends fewer than 183 days in the workday country, if the employer is resident there or has a PE there, the workday country can still tax the income.

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Cross-Border Employment Taxation

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Cross-border employment taxation is one of the most complex areas of international tax. When an employee works in more than one country, both countries may have taxing rights — the country of residence (on worldwide employment income) and the country where the work is performed (on workday income). UK employers with internationally mobile employees must navigate PAYE obligations, split payroll arrangements, treaty relief, and special programmes like the Short-Term Business Visitor (STBV) agreement. Getting this wrong can result in double taxation, penalties, and employee dissatisfaction.

How Employment Income Is Taxed Across Borders

Employment income is generally taxed in the country where the employee is resident (on worldwide income) and the country where the duties are performed (on workday income). Double taxation treaties typically allocate primary taxing rights to the country of residence, with the country of work having taxing rights only if the employee spends more than 183 days there and the employer is not resident there. The UK taxes employment income based on where the duties are performed — UK workdays are subject to UK PAYE, and overseas workdays may be subject to overseas tax.

Split Payroll Arrangements

When an employee works partly in the UK and partly overseas, a split payroll arrangement can be used to allocate PAYE correctly. Under a split payroll: (1) The UK employer operates PAYE on the UK workday portion. (2) The overseas portion is paid gross (without UK PAYE) and may be subject to overseas tax. (3) The employer must keep detailed records of workdays by location. Split payroll arrangements must be agreed with HMRC and require careful administration.

Short-Term Business Visitors (STBV)

The STBV agreement allows UK employers to avoid operating PAYE for employees who come to the UK for short periods (typically up to 183 days). Under the agreement: (1) The employer applies to HMRC for a STBV arrangement at the start of the tax year. (2) For each short-term visitor, the employer reports their UK days and confirms that the conditions are met. (3) If the conditions are met (the employee is resident overseas, works for an overseas employer, and spends fewer than 183 days in the UK), no UK PAYE is operated on the UK workday income. The STBV arrangement simplifies compliance for employers with internationally mobile employees.

Employer Reporting Obligations

UK employers with internationally mobile employees have enhanced reporting obligations: (1) Modified PAYE arrangements — if the employer operates a modified PAYE arrangement (e.g., STBV or net deduction arrangement), they must file annual reports with HMRC. (2) Form P11D — benefits in kind for internationally mobile employees must be reported on Form P11D (or through payrolling). (3) EP Appendix 6 — employers must submit an Appendix 6 arrangement for STBV and modified PAYE schemes. (4) Record-keeping — employers must keep detailed records of travel, workdays, and payments for each employee. Non-compliance can result in penalties and interest.

Key Points

What You Need to Know

Employment income is taxed where the employee is resident and where duties are performed
Split payroll arrangements allocate PAYE between UK and overseas workdays
STBV agreements simplify PAYE for short-term visitors (up to 183 days)
Employers have enhanced reporting obligations for internationally mobile employees
Treaty relief may reduce or eliminate double taxation on cross-border employment income

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