If you employ people who work abroad and pay tax locally, the Appendix 5 arrangement can be a straightforward way to prevent double taxation through PAYE.
As effective as it is, it is not an automatic system, so you should be mindful that you properly implement it to avoid problems further down the line.
What is an Appendix 5 arrangement?
Appendix 5 is a PAYE mechanism that lets employers calculate UK tax due after deducting foreign tax already paid by the employee.
This means that you can adjust the UK payroll to reflect that your employee has been taxed overseas, reducing the likelihood they will face immediate double taxation on the same earnings.
For many UK residents working abroad, knowing that they will not be double taxed on the same earnings makes overseas assignments more financially attractive and removes a common administrative headache for payroll teams.
What are the tax implications for the employee and the employer?
Appendix 5 does not change an employee’s status as a UK tax resident.
UK residents remain subject to UK tax on their worldwide income, so Appendix 5 provides relief at the payroll level rather than eliminating UK tax obligations entirely.
Employees may still have UK liabilities when they complete their self-assessment, depending on treaties and the amount of foreign tax credited.
For employers, the key point is that Appendix 5 reduces immediate double taxation through PAYE, but it does not absolve you or your staff from later reconciliation with HMRC.
How do you qualify and apply?
As mentioned, the Appendix 5 arrangement is not an automatic entitlement, so it is best to seek expert guidance to ensure that it is organised correctly.
Employers must apply to HM Revenue and Customs (HMRC) and demonstrate a good compliance record and that the employee in question is genuinely liable for foreign tax.
You will need to provide evidence of the overseas tax deduction and maintain accurate payroll records showing how the adjustment has been calculated.
HMRC expects proper documentation and may request further information to satisfy itself that the relief is appropriate.
To ensure that applications run smoothly, it is wise to take care when documenting policy so that you can be mindful of any potential exposure to foreign tax requirements.
When staff propose overseas assignments, you should not hesitate in having conversations about residency, treaty position and likely foreign tax liability.
This will allow you to gather evidence of foreign tax payments and ensure your payroll software can handle the necessary adjustments or that you have an adviser who can process them.
When you have the correct information, you should apply to HMRC before making payroll changes and retain contemporaneous records so you can support any future queries.
Appendix 5 is a useful tool for employers supporting international working, but it demands careful documentation and proactive payroll management.
For help assessing whether Appendix 5 is right for your people, preparing an application to HMRC, or updating payroll systems to handle the adjustments correctly, then seek professional expert advice.
To make sure your team can work abroad without unnecessary tax friction, speak to our team today!
