Understanding the Source of Employment Income and UK Taxation
A common issue in UK tax law is determining the source of employment income. The key principle is that the source is based on where the duties are performed, not where the salary is paid from. This has significant implications for an individual’s UK tax position.
Employment income and UK taxation – UK source employment income
Employment income sourced in the UK is always subject to UK tax, regardless of where the salary is paid. However, in some cases, a double tax treaty may override this rule and provide relief.
In general:
- If an employee performs their duties in the UK, the earnings from those duties will be taxed in the UK at the time they are received.
- This applies irrespective of the employee’s residence or domicile status (before 6 April 2025) and will continue for users of the new Foreign Income and Gains (FIG) regime after 5 April 2025.
- Even if the employer is overseas and the salary is paid outside the UK, the income remains taxable in the UK.
- However, for employees on a short-term secondment (less than six months) where salary is paid by an overseas employer, a double tax treaty may provide relief from UK tax.
Employmemt income and UK taxation – UK residents and domiciled employees
Employees who are resident and domiciled in the UK (before 6 April 2025) or long-term UK residents (after 5 April 2025) are taxed on all employment income received in a tax year, regardless of:
- Where the duties are performed
- Where the salary is paid
- Where the income is held
This means that even if a UK-resident employee works abroad for a short period, any earnings for overseas duties are fully taxable in the UK—even if paid into a foreign bank account. Double tax relief may apply if the earnings are also taxed in the overseas country.
Non-Domiciled Employees and Overseas Workday Relief (OWR)
For non-domiciled individuals or those within the FIG regime, the taxation rules are more complex:
- UK income is taxed on an arising basis.
- Earnings from overseas duties may be taxed on a remittance basis if the employee claims Overseas Workday Relief (OWR).
- OWR applies to Remittance Basis users for three tax years following a period of non-residence. The earnings must remain offshore to avoid UK tax.
- Under the new FIG regime (from 6 April 2025), the OWR period extends from three to four years with an annual cap on relief. However, there is no longer a requirement to keep income offshore.
Employment income and UK taxation – taxation for non-UK residents
For employees who are not UK residents, taxation depends on where the employment duties are performed:
- Duties performed in the UK → Fully taxable in the UK when received. This often applies to short-term secondments where the employee does not stay long enough to become UK resident.
- Duties performed outside the UK → Not subject to UK tax.
If a non-UK resident has duties both in and outside the UK, their earnings must be apportioned to determine the portion attributable to UK duties, which will then be taxed in the UK.
Final thoughts
Understanding where employment income is sourced is crucial for tax planning. Whether you’re a UK resident, a globally mobile employee, or an employer managing an international workforce, getting expert tax advice can help navigate these complex rules effectively.
If you would like to speak to a member of our tax team regarding anything contained in this article, please contact us on 020 7870 9050. Our tax team, all based in our London office are only a click or a call away.
