What is Overseas Workday Relief and How Does it Work?
Are you wondering what is Overseas Workday Relief (OWR) and how it can benefit you? If you're a non-UK national working in the UK, OWR might be a way to save on your taxes.
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.
Note: In the Spring Budget 2024, the former government introduced changes to how non-UK income and gains will be taxed for UK-resident taxpayers starting April 2025. These changes remove the relevance of domicile and remittance in determining UK income tax liability. Instead, taxpayers may temporarily exclude such income and gains from UK tax if specific conditions are met. The details below outline the rules for the 2024/25 tax year.
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.
Important Points to Note: Overseas Workday Relief UK
OWR is capped at the lower of 30% of qualifying employment income or £300,000 per tax year.
Transitional Rules
Employees claiming OWR before 6 April 2025 and ineligible for the new FIG regime can continue claiming OWR until the end of their third tax year of residence.
Those eligible for both regimes can claim OWR for four tax years, with no annual £300,000/30% cap.
OWR for pre-2025/26 trailing income remains subject to prior remittance basis rules and must be paid and retained outside the UK.
Election Requirement
OWR must be elected via a self-assessment tax return by the 31 January deadline.
Electing OWR forfeits the income tax personal allowance and capital gains tax annual exemption.
Simplified Payroll Process
OWR can now be processed through payroll with a simple notification and auto-acknowledgment, eliminating the need for HMRC review and approval.
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.
Example Scenario: Calculating Overseas Workday Relief
Scenario Details
Taxpayer: John, a non-UK domiciled individual, moves to the UK for work on 6 April 2025.
Employment Income: £600,000 total qualifying income during the 2025/26 tax year.
Workdays:
- John works 120 days overseas.
- Total workdays in the tax year are 240 (excluding weekends, holidays, and leave).
- John opts for the remittance basis of taxation and keeps his overseas income in an offshore account.
Step 1: Calculate Overseas Workdays Income
The proportion of income earned during overseas workdays is calculated as:
Overseas Workdays Proportion = Overseas Workdays ÷ Total Workdays = 120 ÷ 240 = 0.5
Overseas Workdays Income = Total Employment Income × Overseas Workdays Proportion = £600,000 × 0.5 = £300,000
Step 2: Apply the OWR Cap
OWR is capped at the lower of:
- 30% of qualifying employment income: 30% × £600,000 = £180,000
- Fixed annual cap: £300,000
Since £180,000 is lower, John’s OWR is capped at £180,000.
Step 3: Calculate UK Taxable Income
UK Taxable Income = Total Employment Income - OWR Claimed = £600,000 - £180,000 = £420,000
Summary of John’s OWR Calculation
- Overseas Workdays Income: £300,000
- OWR Cap Applied: £180,000
- UK Taxable Income After OWR: £420,000
John will report the OWR claim on his UK tax self assessment return and ensure that all remittance rules are properly followed.
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. Keep your overseas earnings in a qualifying offshore bank account and report everything accurately to HMRC.
If you need professional advice on figuring out your OWR, consider Taxd!
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 agrees 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.
