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HMRC internal manual

PAYE Manual

Employer records: modified PAYE schemes: expatriate employees (tax equalisation)

An expatriate employee, subject to tax equalisation, is a foreign national who is sent to work in the UK by his employer. (This would typically be a multinational company).

Note: Tax equalisation is a term often used by HMRC and tax professionals to refer to a contractual arrangement between an employer and a foreign national employee working in the UK under which

  • The employee is entitled to a net amount of cash earnings and non-cash benefits
  • The employer agrees to meet all of the UK income tax arising from the cash earnings and non-cash benefits

Modified PAYE, Employment Procedures (EP) Appendix 6

Where an expatriate employee is fully tax equalised, the employer can apply to operate a Modified PAYE arrangement under an EP Appendix 6 agreement. Detailed information on this subject can be found at PAYE81740.

All applications to operate these arrangements must be dealt with by Personal Tax International. Therefore any applications received must be forwarded to them.

Modified NICs, Employment Procedures (EP) Appendix 7A

From April 2006 a new procedure for operating Modified NICs was introduced for 2006-07 and later years for employers who

  • Employ expatriate employees that are fully tax equalised
  • The employees earn above the Upper Earning Limit
  • May receive earnings or benefits paid outside the UK

To apply to calculate and pay NICs on a modified basis under EP Appendix 7A, the employer must have a new updated EP Appendix 6 Modified PAYE arrangement in place.

All applications to operate Modified NICs for expatriate employees must be dealt with by Personal Tax International. Therefore any applications received must be forward to Personal Tax International who will be responsible for processing the

This arrangement requires the employer to

  • Account for NICs in the normal way, using a best estimate of all earnings and benefits that attract Class 1A NICs
  • Enter the figures for NICs on the full payment submissions each month EP Appendix 6
  • Submit the correct figures for NICs on the NSR and pay any additional NICs not reported on the full payment submissions by 31 March following the end of the tax year

Note: In most cases the NSR will show an additional amount of NICs to pay. For years 2012 to 2013 and earlier, this additional amount is processed under the EP Appendix 7A employer reference. However where the NICs originally paid using the best estimate are overpaid, a refund will be due and

  • A refund due to the employer will be processed under the employer’s main PAYE reference
  • For a refund due to the employee, a copy of the NSR will be sent to NICO who will make the refund
  • For 2013 to 2014 and later years, the main PAYE scheme reference is used for the arrangement, a separate EP Appendix 7A scheme reference is no longer used