Category: Employment & Payroll

UK employers with overseas employees

UK employers with employees who normally work overseas may have PAYE and National Insurance obligations when those employees come to the UK to carry out their duties in the UK on a short-term basis.

Employers should consider the position whenever an overseas employee visits the UK to work. The fact that the employee remains employed and paid by an overseas company does not, by itself, mean that there is no UK PAYE obligation. In some circumstances, the UK company hosting the employee may be responsible for operating PAYE.

There are arrangements that can help employers with the normal PAYE requirements for qualifying short-term business visitors. For example, an EP Appendix 4 arrangement may allow a UK host employer not to operate PAYE where the relevant conditions are met, including where a double taxation agreement applies and no UK Income Tax liability ultimately arises. National Insurance needs to be considered separately, as an Appendix 4 arrangement does not cover NICs.

Where PAYE is required but it is impractical to operate it in the normal way, an EP Appendix 8 arrangement may be available for certain short-term business visitors. This allows the employer to report and pay the relevant tax after the end of the tax year, subject to the conditions of the arrangement.

If you have overseas staff working in the UK, we can help you make sure your payroll processes are correct. 

Tax relief for uniforms and protective clothing

Employers providing uniforms or protective clothing to employees need to understand the tax and National Insurance rules that apply. The treatment depends on whether the clothing is required for the employee’s job, is a uniform worn only at work, or is simply additional clothing provided by the employer.

Most uniforms and protective clothing are exempt from tax and National Insurance, provided they meet the relevant conditions. This can include the cost of buying, cleaning, repairing or replacing a recognisable uniform or protective clothing required for the employee’s job. Where an exemption applies, the benefit does not need to be reported to HMRC.

However, employers may need to report clothing provided to employees on form P11D where the exemption does not apply. This can include the cost of buying clothing, lending it to employees, or paying for cleaning and repairs.

Other clothing provided by an employer is generally treated differently. If clothing is not a uniform or protective clothing, the cost is normally a taxable benefit. The employer may need to report the benefit, pay Class 1A National Insurance and the employee may have tax to pay.

Employers should review the tax treatment whenever clothing is provided to employees, particularly where the clothing is not clearly a uniform or protective item. Keeping clear records of the clothing provided, its purpose and how it is used will help employers determine whether an exemption applies and support the treatment adopted if HMRC asks for evidence. 

Official rate of interest for beneficial loans

Employers providing loans to employees or directors need to ensure they correctly calculate any taxable benefit using HMRC’s official rate of interest. Where a loan is provided at no interest or at a rate below the official rate, a taxable benefit may arise. These types of loans are referred to as beneficial loans.

A beneficial loan therefore occurs when the interest paid by the employee or director is less than the interest that would have been payable using HMRC’s official rate of interest. The taxable benefit is generally calculated on the difference between the interest due at the official rate and the amount of interest actually paid.

The official rate of interest is set by HMRC and is used to calculate the taxable benefit for each tax year. Employers must use the correct rate when reporting benefits through payroll or on form P11D. The rate may change over time, so employers should check the applicable rate for the relevant tax year. For the 2026-27 tax year, HMRC’s official rate of interest is 3.75%. Employers should use the correct rate for the relevant tax year when calculating the taxable benefit on beneficial loans.

For example, if an employee receives an interest-free loan, the employer must calculate the interest that would have been charged using the official rate and report this amount as a taxable benefit, unless an exemption applies.

Certain loans may be exempt from the beneficial loan rules, including some small loans where the total outstanding balance does not exceed £10,000 throughout the tax year.

Employers should review any loans provided to employees or directors regularly to ensure the correct calculations are made and benefits are reported accurately.

Does your business need to register as an employer?

If you are starting to employ staff or engaging subcontractors for construction work, you will generally need to register as an employer with HMRC. This obligation extends even to individuals who are the sole director of their own limited company, in other words, you must register even if you are only employing yourself.

It is important that you register before your first payday to obtain your employer PAYE reference number, which is essential for operating PAYE correctly. You cannot register more than two months prior to the date you intend to start paying people.

Should circumstances require you to pay an employee before receiving your PAYE reference number, you should still run payroll, securely store your full payment submission and subsequently send a late full payment submission to HMRC.

For limited companies with one to nine directors, online registration is typically available. After completing your registration, you can check HMRC's guidance to understand when to expect your official letter confirming your employer status and providing your PAYE reference number. There is also an option to continue an application if you have already started the registration process.

To ensure compliance and avoid issues, register with HMRC before your first payday, or follow the specific late submission process if payment is unavoidable beforehand.

Filing deadlines for reporting expenses and benefits

Employers providing employees with expenses or benefits in kind must comply with specific reporting, filing, and payment obligations each tax year. These requirements are designed to ensure that benefits are correctly reported, and that the appropriate tax and National Insurance contributions are accounted for.

For the 2025–26 tax year, employers must report employee expenses and benefits to HMRC and provide employees with copies of the relevant information by 6 July 2026. By the same deadline, employers must also submit form P11D(b) and declare the total Class 1A National Insurance contributions due unless all benefits have been payrolled.

Payment of Class 1A National Insurance is required by 22 July 2026 (or 19 July if paying by cheque). Where an employer operates a PAYE Settlement Agreement, any tax and Class 1B National Insurance must be paid by 22 October 2026 (or 19 October if paying by cheque). Employers who choose to payroll benefits must account for tax and Class 1 National Insurance through the monthly payroll process during the year.

Employers are required to maintain adequate records to support the reporting of all expenses and benefits, including valuation calculations and supporting documentation. Certain exemptions and dispensations may apply in limited circumstances, reducing reporting requirements.

Late submission of form P11D(b) attracts penalties of £100 per 50 employees for each month or part month of delay. Additional penalties and interest may also arise where payments to HMRC are made late.

Increase in employment costs 2026-27

From April 2026, the National Minimum Wage and National Living Wage rates have increased, and businesses should ensure payroll systems are updated immediately so that employees receive the correct statutory pay. These changes apply from the start of the 2026-27 tax year and form part of the Government’s ongoing policy of maintaining minimum earnings levels that reflect wider wage growth and living cost pressures.

The key rates from 1 April 2026 are as follows:

• Age 21 and over (National Living Wage): £12.71 per hour
• Age 18 to 20: £10.85 per hour
• Age 16 to 17: £8.00 per hour
• Apprentice rate: £8.00 per hour

These increases mean many employers will see a rise in employment costs during 2026-27, particularly where businesses rely on part-time staff, seasonal workers, or apprentices. Around 2.7 million workers are expected to benefit from the increase, reinforcing the importance of ensuring compliance from the first pay period after 1 April 2026.

For employers, the immediate priority is to review payroll settings, salary sacrifice arrangements, and employment contracts to confirm that hourly pay levels meet or exceed the new statutory thresholds. Failure to apply the correct rates can result in penalties and reputational risk, as HMRC has powers to require repayment of arrears and to publicly identify employers who do not comply with minimum wage legislation.

It is also important to consider knock-on effects. Businesses paying slightly above the previous minimum wage may wish to review pay differentials across their workforce in order to maintain fairness and staff morale. In practice, increases in the statutory minimum often lead to wider wage adjustments as employers maintain distinctions between entry-level and more experienced roles.

Employing young people in your business

When a new employee joins your payroll, it is the employer’s responsibility to ensure they are aware of their rights and that the correct tax is deducted from their salary. This responsibility also applies when employing young people in your business.

You can employ young people from the age of 13, but special rules govern how long they can work and the types of work they can perform. Once someone turns 18, they are classed as an adult worker, and different employment rules then apply. Young workers and apprentices also have different National Minimum Wage rates compared to adult employees.

Before taking on young workers, employers must carry out a risk assessment to ensure a safe working environment. Young people may also be entitled to certain employment rights, including statutory maternity pay and ordinary statutory paternity pay if they qualify through continuous employment, paid time off for study or training and redundancy pay.

It is important to note that different rules apply if you engage volunteers or voluntary staff. Regardless, employers are responsible for health and safety, providing proper inductions, and ensuring employees are adequately trained for the tasks they are going to do.

Entertaining employees

In general, entertaining employees is an exception to the normal rule that business entertainment costs are not allowable for tax purposes. If an employer provides entertainment exclusively for employees and it is “wholly and exclusively for the purposes of the trade”, then the expenditure is allowable as a business deduction. Examples include a staff Christmas party, or a sporting event open only to employees.

It is important that the entertainment is not merely incidental to hospitality provided for customers. The definition of employees accepted by HMRC can extend to retired staff and the partners of existing and past employees.

Although the expenditure is allowable, the employees themselves may have to pay tax on the entertainment received and the employer will have to report this on form P11D. To counter this, many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees

Proper record keeping is important to be able to demonstrate where legitimate staff entertainment has taken place. Care should be taken to ensure that staff entertaining is reasonable, as excessive entertainment could lead to a tax charge for employees even if the employer’s costs have been disallowed (in whole or in part).

PAYE rules for labour supply chains (umbrella companies)

From 6 April 2026, significant changes to PAYE rules will affect umbrella companies, recruitment agencies, and end clients, increasing shared responsibility for payroll compliance across labour supply chains.

Umbrella companies are often used by freelancers, contractors, and temporary workers who prefer not to operate as limited companies or set up their own businesses. Essentially, an umbrella company acts as an intermediary between the worker and the end client (or recruitment agency), handling payroll, taxes and other administrative tasks on behalf of the worker. This includes any business supplying labour under a contract of employment.

There are significant changes to the PAYE rules for labour supply chains taking effect from 6 April 2026. Under the new rules, if an umbrella company fails to operate PAYE correctly or underpays tax and NICs, HMRC can recover the amounts due from the recruitment agency that has the contract with the end client, rather than pursuing only the umbrella company. Where there is no recruitment agency involved, the end client becomes responsible. This significantly widens the requirement for all parts of the labour supply chain to ensure that these umbrella companies are fully compliant with all payroll obligations.

Umbrella companies still remain the legal employer of the workers, but recruitment agencies and end clients will now share responsibility for ensuring PAYE is operated correctly from April 2026 onwards.

Starting or changing jobs

Providing the right information when you start a new job helps ensure your tax code is correct from the first pay day and avoids the risk of paying too much tax.

When starting a new job or taking on additional employment, your new employer will usually send your income details to HMRC, which are used to calculate your tax code. If this information is not provided in time, or you choose not to share it, you may be placed on a temporary emergency tax code.

To avoid this, you should provide your new employer with your P45. If you do not have a P45 or do not wish to supply it to your new employer then you should complete HMRC’s starter checklist.

You can check your employment details via HMRC’s online services or mobile app, ensuring only one employer is using the standard 1257L tax code and that your estimated income is accurate. This should be available to view within 6 weeks after your first pay day.

If your records are incorrect or incomplete, you can update your employer details, add or remove employers and amend your estimated income or benefit information directly with HMRC. These updates can help prevent underpayment or overpayment of tax.

These changes may or may not affect your tax code. If the changes result in a change, HMRC will notify your employer.