What is Overseas Workday Relief and How Does it Work?

This relief allows you to pay UK tax only on the income you earn from UK workdays, while the income from your non-UK workdays remains tax-free if it isn't transferred to the UK. Let's look into how OWR works and what you need to do to take advantage of it.

What is Overseas Workday Relief?

Overseas Workday Relief (OWR) is generally available to non-UK domiciled employees who come to work in the UK, as outlined in RDR4 OWR. If certain overseas workday relief conditions are met, the employee is only subject to UK income tax on the portion of their employment income related to their UK workdays. The portion of their employment income related to their non-UK workdays is not subject to UK tax, provided it is not remitted (transferred) to the UK. This relief applies for the tax year of arrival and the following two full tax years.

How Does Overseas Workday Relief UK Work?

Employers can arrange with HMRC in advance to determine the proportion of earnings to be taxed. Without such an agreement, the employer must apply PAYE to all earnings, and the employee would need to claim an OWR deduction through their self-assessment tax return.

It's also important to note that a remittance claim needs to be made, and the individual may lose their personal allowance.

Overseas Workday Relief Conditions

To qualify, you must have been non-resident in the UK for 3 consecutive tax years out of the previous 5 immediately preceding the year in question.

To fully benefit from Overseas Workday Relief, the employee's earnings should be paid into a non-UK bank account that:

• Is solely in the name of the employee.
• Contains only employment income from a single employment.
• Has a balance of less than £10 when the employment income is first deposited.

It is advisable to set up this account before arriving in the UK. The employee must nominate this account in writing to HMRC on their self-assessment tax return. Although not mandatory, it is recommended to open a new account each tax year.

HMRC frequently reviews claims for Overseas Workday Relief, so maintaining thorough records is essential. For example, they may request work calendars and plane tickets as evidence for such claims.

Calculating Overseas Workdays

Determine the proportion of your total employment income that relates to overseas workdays. This involves calculating the number of overseas workdays as a percentage of total workdays.

Example calculation:

John recently moved to the UK for a new role and earns a salary of £100,000. He spends 20% of his workdays overseas for business purposes.

Total Workdays: 250 days

Overseas Workdays: 50 days

UK Workdays: 200 days

To find the proportion of income from overseas workdays:

Proportion = Overseas Workdays / Total Workdays = 50 / 250 = 0.2

John then multiplies his total employment income by the proportion calculated to determine the income eligible for Overseas Workday Relief (OWR).

Total Employment Income: £100,000

Income from Overseas Workdays: £100,000 × 0.2 = £20,000

Note: It can be tricky for employers to make split payments, so most taxpayers receive all their income offshore and then transfer the necessary amount to a UK account. This is a common practice for managing OWR.

Important Points to Note: Overseas Workday Relief UK

Ensure the portion of the income from overseas workdays is kept in an offshore bank account that meets the specified criteria:

• Solely in your name
• Contains only employment income from a single employment
• Balance of less than £10 when the employment income is first deposited

Reporting and Claiming OWR

• If your employer has a '690 apportionment' agreement with HMRC, they will deduct the correct amount of tax.
• If not, you will need to claim OWR through your self-assessment tax return.

Include the necessary details about the offshore account and nominate this account in writing to HMRC on your self-assessment tax return.

Pay Tax on Remitted Income

If you remit any of the income from overseas workdays to the UK, you will need to pay UK income tax on the remitted amount.

Bottom Line

Overseas Workday Relief can be a great tax-saving tool for non-UK domiciled individuals working in the UK. By following the guidelines and maintaining proper records, you can ensure that you're only taxed on the income from your UK workdays. Remember to keep your overseas earnings in a qualifying offshore bank account and report everything accurately to HMRC.

FAQs

1. What is Overseas Workday Relief UK?

OWR is a tax relief that allows non-UK domiciled individuals working in the UK to pay UK tax only on the income earned from their UK workdays. Income from non-UK workdays is tax-free if it is not brought into the UK.

2. How do I qualify for OWR?

To qualify, your overseas earnings should be paid into a non-UK bank account that is solely in your name, contains only employment income, and has a balance of less than £10 when the income is first deposited. Additionally, you must have been non-resident in the UK for 3 consecutive tax years out of the previous 5 immediately preceding the year in question.

3. How do I calculate the proportion of my income from overseas workdays?

Calculate the number of overseas workdays as a percentage of your total workdays. For example, if you have 250 total workdays and 100 of those are overseas, the proportion is 100/250 = 0.4. Multiply this proportion by your total employment income to determine the amount eligible for OWR.

4. How do I claim OWR on my taxes?

If your employer has an agreement with HMRC, they'll handle the tax deductions. If not, you'll need to claim OWR through your self-assessment tax return. Include details of your offshore account and nominate this account in writing to HMRC.

5. What happens if I transfer overseas income to the UK?

If you transfer (remit) any income from your overseas workdays to the UK, you'll need to pay UK income tax on that amount.