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HMRC internal manual

PAYE Manual

PAYE operation: international employments: tax equalisation arrangements

Subjects needing special care

Tax equalisation is an arrangement common in multinational groups with highly mobile employees who work around the world. Its purpose is to make sure that an employee who comes to the UK has broadly the same take home pay wherever he / she is employed.

The remainder of this subject is presented as follows


How tax equalised arrangements work under EP Appendix 6

EP Appendix 6 describes a tax equalised 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

The employer calculates PAYE based on the best estimate of all cash earnings and non-cash benefits for the year, grossed up for tax purposes. The actual earnings and benefits are reported on the employee’s self-assessment tax return by 31 January following the end of the tax year. Any additional tax is paid following the submission of the return.

In addition, the employer normally provides the services of a professional advisor or an in-house specialist to deal with the tax equalised employee’s UK tax affairs. Help Sheet IR212 on tax equalisation provides advice to employers or professional advisors who prepare self-assessment tax returns for tax equalised employees.

The application for modified PAYE for tax equalised employees is shown at PAYE82002.

Tax equalised arrangements under EP Appendix 6 - Other aspects

How does the employer calculate the amount of tax to be remitted?

The employer calculates PAYE due by grossing up the net pay and taking into account any UK coding allowances due to the employee. This is done using Tax Table G, the special table used for employees who receive payment free of tax.

The subjects ‘Free of Tax Payments’ (PAYE72025) and ‘Free of Tax System’ (PAYE20035) show how Tax Tables G are used to calculate the tax to be remitted.

Employer’s commitment

Employers are responsible for any errors that occur in the calculation of tax to be remitted and must make good any PAYE underpayment arising from

  • The incorrect operation of PAYE
  • Incorrectly applying a code number


  • Inaccurate grossing up

If PAYE is overpaid, the repayment (which is legally repayable to the employee) is usually repaid to the employer by mandate.

Apportionment under Section 690 ITEPA

Where an apportionment under Section 690 (PAYE81545) is made, any grossing-up will be after the earnings have been apportioned between UK and non-UK duties.

Cases of doubt or difficulty

Ask Personal Tax Customer, Product & Process, PAYE Technical, Shipley, for advice in any case of doubt or difficulty involving tax equalisation. (This content has been withheld because of exemptions in the Freedom of Information Act 2000) .

Tax equalised arrangements under EP Appendix 6: Modified NICs

From 2006-07 employers authorised to operate modified PAYE under EP Appendix 6 for tax equalised employees can also apply to calculate and pay National Insurance Contributions (NICs) on a modified basis under an EP Appendix 7A agreement. This applies to employees who

  • Are subject to an EP Appendix 6 agreement


  • Are assigned to work in the UK from abroad and have an employer or host employer in the UK who is liable for secondary UK NIC liabilities


  • Pay NICs on earnings above the annual upper earnings limit for the year or on earnings at or above the upper earnings limit in each earnings period throughout the year

Under this arrangement, the employer accounts for NICs on a best estimate of all earnings that attract Class 1 liability. The exact earnings figures and any residual NICs are then reported by the employer on a NIC Settlement Return (NSR) (PDF31KB) by 31 March following the end of the tax year.

The application for modified NICs for tax equalised employees under EP Appendix 7A is shown at PAYE82003.

Tax equalisation generally

An employee who is tax equalised on only part of their general earnings should be dealt with by the employer in accordance with the ‘free of tax’ arrangements detailed in the CWG2 Employer Further Guide to PAYE and NICs.

Where tax equalisation arrangements for these employees cover specified non-cash benefits, it is often more convenient for the benefits to be included in the earnings subject to PAYE and grossed up. If so, the benefits in kind must be included at the taxable value. If an employer wishes to treat benefits in this manner, they must seek prior agreement from their HMRC office.

Such an arrangement saves coding adjustments for the employee, employer and HMRC. But employers must still complete form P11D and copy the information to the employee and submit completed forms P11D and P11D(b) to HMRC by 19 July following the end of the tax year. The 19 July deadline does not apply where the employee is within an EP Appendix 6 agreement.