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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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S26 and S26A, Foreign Earnings and Overseas Workday Relief with effect from 6 April 2013

Part 2 Chapter 5 ITEPA 2003

Section 26, 26A

Where a non-UK domiciled employee establishes residency in the UK, any general earnings from employment will be taxable under section 15 ITEPA 2003 unless the employee chooses to pay tax on the remittance basis. Where such an election is made, the employee will only pay tax on his or her foreign earnings to the extent that they are remitted to the UK. Section 26 deems such foreign earnings to be taxable earnings but in order to get to that point, the conditions set out in section 26A need to apply.

The provisions of section 26A

This section applies to those taxpayers who have recently arrived in the UK or are returning after a significant period of non-residency. For this section to apply for a taxpayer must have a recent 3 year period of non-residency. It can apply if a taxpayer has been:-

  • Non-UK resident for the previous 3 tax years, or
  • UK resident for the previous tax year but non-UK resident for the 3 tax years before that, or
  • UK resident for the previous 2 tax years but non-UK resident for the 3 tax years before that, or
  • Non-UK resident for the previous tax year, UK resident for the tax year before that and non-UK resident for the 3 tax years before that.

Where a taxpayer satisfies one of these conditions and has elected to pay tax on the remittance basis, any foreign earnings will only be charged to tax in the UK when remitted to the UK.

A taxpayer can fall within the provisions of section 26A more than once in his or her lifetime. It may be that a taxpayer has a significant period of residence in the UK after which he or she may be absent from the UK for a number of years. If they subsequently establish another period of UK residence, it will be necessary to consider whether they have a recent 3 year period of non-residency as detailed in section 26A. If they do fall within section 26A, any foreign earnings are subject to the conditions of section 26 rather than being considered as chargeable overseas earnings under section 22 (see EIM40105).

The term “foreign earnings” is used only in the title of section 26. The requirements of the legislation itself are framed in terms of general earnings. The general earnings to which this section applies must be neither:-

  • General earnings in respect of duties performed in the UK, nor
  • General earnings from overseas Crown employment subject to UK tax

If the tax year is a split year as respects the employee, section 26 will apply only to the foreign earnings attributable to the UK part of the year. There will be no UK tax charge on the foreign earnings attributable to the overseas part of the year.

Where the earnings need apportioning to decide the extent of the earnings in respect of duties performed in the UK, section 41ZA ITEPA 2003 requires that a just and reasonable basis is applied. Further details on this are included in leaflet RDR4.

The full amount of any foreign earnings which are remitted to the UK in a tax year will be an amount of taxable earnings for the purposes of the charge to UK tax. Where a non-domiciled, remittance basis UK resident employee is paid in full in the UK for all duties, irrespective of where these are performed, any part of the earnings which relate to foreign duties will be remitted to the UK and chargeable under section 26. Where foreign earnings are paid into a bank account held outside the UK, these will only be taxed in the UK when remitted.