Overseas workday relief – what’s changed?

The UK operates a relief which broadly eliminates UK tax on employment income relating to the overseas duties of certain workers. However, the rules have now changed with the non-domicile reform. But what are the key points you should know about?  Tax Partner, Kenny Adamson discusses in this article.

By default, once an individual is UK resident, their worldwide income and gains are taxable on an arising basis subject to the terms of any double taxation agreement with the individual’s home country. Before 6 April 2025, individuals whose usual abode was overseas, i.e. non-domiciled, were able to access the remittance basis so UK tax only applied to income and gains remitted to the UK.

But because of the fundamental reforms from 6 April 2025, the new foreign income and gains (FIG) regime exempts overseas income and gains arising in the first four years of an individual’s residence. However, employment income does not sit neatly within any of these rules because many situations are not bilateral, often involving a mix of UK and non-UK duties.

What is overseas workday relief?
Coming to the rescue is overseas workday relief (OWR) which deducts earnings relating to overseas employment duties from taxable income (although not for NI purposes).

Until 5 April 2025, OWR was available for the first three tax years for non-domiciles who had previously been non-resident for at least three consecutive tax years.

The OWR revamp, effective from 6 April 2025, encompasses:

• Revised eligibility criteria based on long-term residence
• The scrapping of the need to keep income offshore
• A capping of the relief; and
• A more efficient PAYE notification system.

Although the aim is simplification, new complexities have been introduced, particularly as the claiming process is convoluted. It is vital to ascertain where duties are carried out and to correctly identify the tax year(s) in which income is earned and received.

Eligibility
From 6 April 2025, qualifying new residents will be eligible to use OWR for the tax year of arrival and the next three tax years. As a qualifying new resident is defined as an individual who has been non-resident for the previous ten tax years before the tax year of arrival, repatriating British nationals are included.

Residence is tested under the ‘statutory residence test’, ignoring the effect of any double taxation agreement. Split years, where the individual is resident for a portion of the year, and the year of arrival itself count as a whole tax year. The clock keeps ticking throughout the four years no matter where the employee is resident in that time.

Overseas workdays
Subject to certain exceptions, the worker must be physically present in the UK if undertaking UK duties, e.g. remotely working abroad for a UK employer is undertaking overseas duties. The following are always deemed to be undertaking UK duties:

• Crown servants
• Individuals working in the UK’s territorial waters or on the continental shelf; and
• UK-resident transportation workers, e.g. seamen, who undertake journeys involving a UK arrival or departure point.

For the purposes of OWR, any day in which overseas duties are undertaken counts as an overseas workday which incidental UK duties will not prejudice. However, HMRC states that essential training or UK board meetings are not incidental.

In contrast, the statutory residence test only treats a day as an overseas workday where overseas duties exceed three hours of that day.

Anyone claiming OWR must retain appropriate evidence such as flight details and work diaries.

Bringing overseas earnings to the UK
To encourage employees to spend their income in the UK, there is no longer any restriction on remitting income in respect of overseas duties undertaken since 6 April 2025.

Any income relating to 2024/25 or earlier must still be kept offshore for OWR to apply.

Calculation
While the previous relief was unlimited, a cap applies from 6 April 2025 restricting OWR to the lower of 30% of the qualifying employment income arising in a tax year and £300,000. For this purpose, qualifying employment income is the total net employment income, i.e. after apportioned expenses arising from any sources of employment in that tax year.

Transitional measures
Certain employees will have been in the middle of their OWR period on 6 April 2025, in which case no cap applies for the remainder of the period. The length of the OWR period for employees eligible for the FIG regime from 6 April 2025 is extended to four years. However, any income which relates to the pre-6 April 2025 period must still be kept offshore. This includes bonuses which, though paid after 5 April 2025, relate to duties undertaken pre-6 April 2025, so-called trailing income.

It is possible to make a temporary repatriation relief claim in respect of trailing income so it can be brought onshore.

Claiming
From the employee’s perspective, OWR actually requires the following two claims:

1. A foreign employment election available in each of the first four years; and

2. A foreign employment relief claim which quantifies the amount of OWR (which could be in a later tax year to 1).

Both must be made by the anniversary of 31 January following the relevant tax year, necessitating a self-assessment tax return (whether or not the employer applies PAYE on the basis of OWR). The immediate impact of any claim will be the loss of the personal allowance, loss relief and annual exemption.

Calendar year information (needed in respect of the last quarter of the tax year) may not be available in time. An inaccurate OWR claim in 2. will need to be amended otherwise an amount of overseas income will become taxable.

Current and prior tax years will need monitoring for trailing income and the application of the cap.

PAYE
From 6 April in the relevant tax year, employers can make a ‘globally mobile employee’ notification online that the PAYE calculation will incorporate an OWR deduction.

A fresh notification will be needed for every tax year. Any pre-6 April 2025 arrangements are defunct.

This process now and check later approach avoids delays but does present a future risk that HMRC may raise queries. HMRC can also impose its own direction as to the overseas proportion of earnings where it regards the original notification as insufficient.

IN SUMMARY
For tax equalised employees, where the employer bears any extra tax costs of coming to the UK, OWR represents a real cash saving.

You must be aware of the transitional rules, e.g. income in the current tax year can be brought to the UK under the foreign income and gains regime, but income arising prior to April 2025 must still be kept offshore. If you are affected by this, consider using the temporary repatriation facility to bring old income onshore.

Please do contact the JRW Hogg & Thorburn team for any further information and queries you may have.