Overseas Workday Relief (‘OWR’) allows non-domiciled individuals, who have recently moved to the UK, to not be taxed on the portion of their employment income that relates to their non-UK workdays.
The main points to note:
- The relief is available for the first three tax years of residence.
- Before coming to the UK, the individual must have been UK non-resident for at least three years consecutively.
- The relief makes use of the remittance basis of taxation. Therefore the individual must be domiciled outside the UK
- The employment income should be paid into an offshore account
- For the foreign earnings to not be taxed, they must not be remitted to the UK
How Overseas Workday Relief Works
The UK employer will withhold tax at source on the individual’s total earnings under PAYE. After the end of the tax year, the individual will need to determine how much of their earnings related to UK duties, and how much related to non-UK duties. Allocation of UK earnings and foreign earnings is usually done on a time spent basis.
The individual will then claim OWR on their personal self-assessment tax return, that is due after the end of the tax year.
Most likely this will lead to a refund of the tax that relates to your non-UK workdays.
The employer will need to deposit the individual’s earnings into a non-UK account. Many people use accounts in the Isle of Man or the Channel Islands since it is straightforward for deposits to be made there by the employer, as they are within the UK banking system.
It is best that an account is created specifically for the purpose of receiving employment income. The qualifying account should have less than £10 before the first deposit of employment income. It is advisable that the account is not used for any other purpose than to receive employment income.
In order to obtain full overseas workday relief, individuals should be mindful to limit the amount of money they bring to the UK, in accordance with the proportion relating to UK employment duties.
Jonathan moved to the UK in April 2020 and is eligible for OWR. He receives a salary of £100,000. When he comes to file his tax return for the year, he looks at where his workdays were spent and finds that 30% were overseas. Therefore he can claim overseas workday relief on £30,000, and consequently, only £70,000 is subject to tax.
How to Count Workdays
While there is no explicit definition as to what counts as a working day, the following general principle should generally be adopted: if a day is substantially spent working then it will count as a working day. This will apply whether or not the day falls on a weekend or public holiday.
Days in which a substantial amount of time are spent travelling to or from an overseas workplace will usually count as a workday. The international nature of business travel can make it difficult to determine whether a particular day of travel was substantially spent working. HMRC outline one approach that can be used here, although other approaches are usually acceptable if they fit the facts of the situation appropriate, and are applied fairly.
Disadvantage of Claiming Overseas Workday Relief
Claiming the remittance basis means that an individual will lose the tax free personal allowance. In tax year 2020/21 the personal allowance is £12,500. Therefore, if the amount of income on which overseas workday relief can be claimed is small, it might not be worth claiming. Though note that individuals with income of over £100,000 are subject to a phase-out of the personal allowance in any case.
Michael receives a salary of £50,000 and has 20% of workdays overseas. The overseas workday relief will be £10,000. However, the personal allowance that he would lose is £12,500 (for tax year 2020/21). Therefore it doesn’t make sense to claim OWR.
After 3 Years
Overseas Workday Relief isn’t available after the first 3 tax years of residence. This means that all employment income will become taxable in the UK.
- The employer is a non-resident.
- All employment duties are performed outside the UK, except for those workdays that are purely ‘incidental’. For HMRC purposes, ‘incidental’ refers to work that is ancillary or subordinate to the work done overseas, and is not of the same kind, and not of the same importance, to the work performed overseas.
- The income is not remitted to the UK.
In the past it was more common for employers to arrange dual contracts. One contract would cover UK duties, and the other contract would cover non-UK duties. Earnings under the non-UK duties contract would not being UK taxable under the remittance basis. HMRC has historically investigated many claims as to whether the non-UK contract was performed wholly outside the UK. HMRC tends to regard many dual contracts as an artificial separation of UK and overseas work. From April 2014 anti-avoidance legislation applies which heavily restricts the ability to successfully use dual contracts. Consequently these are used much less frequently.
As mentioned above, it is normal for the employer to tax all earnings under PAYE, and for the individual to then claim relief on their self-assessment tax return for OWR, which often leads to a refund.
However, it’s possible for the employer to obtain clearance from HMRC under section 690 (see here for link to HMRC).
Using section 690, the employer estimates the ratio of UK workdays to overseas workdays, and only subject the estimated portion relating to UK workdays to tax. This means that the employee will not be taxed under PAYE on the estimated portion of non-UK work.
Normally it will still be necessary for the employee to complete a self-assessment return after the end of the tax year. The tax return they will show the exact portion attributable to their UK workdays and their non-UK workdays.
Section 690 therefore tends to be of use to those who are keen to have the relief ‘upfront’ rather than wait until their tax return is filed.
- Copies of expense reports with tickets, invoices, receipts and other supporting documentation including boarding cards.
- Personal notes and documents that can be used to reconstruct the individual’s itinerary, and a broad outline of duties undertaken on any particular day e.g. meetings, appointments etc.
HMRC provide further information on OWR under RDR4, which can be found here.