Host employer PAYE for staff employed abroad

Q: What does this look like in practice?

Illustration only. A German parent company seconds an engineer to its UK subsidiary for three years. She stays on the German payroll, is paid in euros, and the parent recharges her cost to the UK company. The German company has no UK branch. The UK subsidiary is the relevant person under section 689. It must set up a payroll record, report her earnings converted to sterling on each FPS, and pay the UK tax. Her German salary and any benefits the parent provides, such as housing, are part of the earnings the UK company must capture, whatever the recharge says. If her contract promises a net salary with UK tax met by the group, the PAYE amount is grossed up under section 689(3)(a); see tax equalisation for mobile employees for the modified PAYE arrangement that groups often use. National Insurance turns on whether she holds a certificate of coverage for German contributions. If she does, no UK Class 1 is due for that period.

Section 689 ITEPA 2003 makes a UK business operate PAYE on the pay of someone it does not employ, where that person works for the UK business but is employed and paid by an overseas company that is outside the scope of PAYE and does not deduct UK tax itself. The UK business is treated as making the payment, so it must report the full earnings, including amounts paid abroad, and account for the tax. Parallel National Insurance rules make it the secondary contributor as well.

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When does section 689 apply?

Section 689(1) applies where all of these are true for a period:

the employee works for a person (the relevant person) who is not their employer;
a payment of PAYE income for that period is made by the employer, or by an intermediary of the employer or of the relevant person;
the PAYE regulations do not apply to the person making the payment (or, where an intermediary pays, to the employer); and
income tax is not deducted or accounted for under the regulations by that payer or employer.

Where those conditions are met, section 689(2) treats the relevant person as making a payment of PAYE income for the purposes of the PAYE regulations. HMRC’s PAYE Manual at PAYE81511 puts it simply: where an employer has no UK presence and does not choose to operate PAYE voluntarily, section 689 treats the UK entity for whom the employee works as making the payments, and the requirement applies automatically. Whether the overseas employer has a UK presence is a question HMRC addresses at PAYE81610; a branch, agency or representative office counts, but employees working from their own homes do not.

Who counts as working for the UK business?

Section 689(6) defines work as the performance of any duties of the employment. The typical cases are a secondee from an overseas group company working in a UK subsidiary, and a worker supplied by a foreign agency. HMRC’s CWG2 guide for 2026 to 2027 says PAYE must be operated in the usual way for employees who work under the day to day control and management of a business in the UK, expressly including directors, and that the UK business using the services must operate PAYE as if it were the employer whether the pay comes from the UK business, the overseas employer or both.

A UK subsidiary is a separate legal entity, so PAYE81620 treats it like any independent UK concern: it is the duty of the UK company to operate PAYE on employees seconded to it. A UK branch of the overseas employer is different, because the branch gives the employer itself a UK presence and the employer then operates PAYE directly (PAYE81605).

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What if there is a UK agency in the chain?

Section 689(1B) and (1C) deal with arrangements between the UK business and a third person. If the employee works for the relevant person under arrangements made with a third person, that third person did not make the payment, and the PAYE regulations would apply to the third person if it did, then the third person is treated as making the payment instead. In practice this means a UK agency that contracts with the end client to supply a worker employed by a foreign company can be the one required to run PAYE, rather than the end client.

Section 689 does not apply where section 689A applies. That section has its own rule for oil and gas workers on the continental shelf.

How much pay must the UK business put through PAYE?

Section 689(3) sets the amount treated as paid. If the employee is entitled to a net amount after UK tax, the deemed payment is the net payment plus the tax due on it, so the pay has to be grossed up. Otherwise it is the amount actually paid.

PAYE81620 makes clear that the UK concern must find out the employee’s total earnings from the UK employment, including payments made by the overseas concern, and remit the UK tax and NICs on the total. Any recharge or management fee from the overseas company, whether larger or smaller than the pay, does not change this. If no recharge is made, the UK business must still pay the tax and NICs and should arrange for the overseas employer to fund them. CWG2 adds that where any pay or benefits come from the overseas employer, the UK business must gather the details needed to operate PAYE and complete forms P11D; see our guide to P11D and P11D(b) forms.

Does the UK business also pay employer National Insurance?

Usually yes. Paragraph 9 of Schedule 3 to the Social Security (Categorisation of Earners) Regulations 1978 treats the host employer as the secondary contributor where a foreign employer makes an employee available to provide services to the host employer. A foreign employer is defined as one not meeting the residence or presence conditions in Great Britain, and a host employer as a person with a place of business, residence or presence here. CWG2 confirms that if an employer outside the UK with no place of business here makes its employees available to work in your business, the law treats you as their employer for National Insurance, and you must register with HMRC as an employer if you have not already done so.

Two National Insurance exceptions are worth checking first. An employee with a certificate of coverage from a country that has a social security agreement with the UK pays into that country’s scheme instead; see A1 certificates and social security abroad. And CWG2 says contributions are not payable for the first 52 weeks, from the first Sunday after arrival, for an employee who does not normally live or work in the UK and is sent here temporarily by an overseas employer with a place of business outside the UK.

Can PAYE be reduced for short visits or work abroad?

Section 689 decides who operates PAYE; it does not decide how much of the pay is taxable in the UK. CWG2 explains that where an employee is likely to be protected from UK tax by the employment article of a double taxation treaty (broadly, presence of no more than 183 days in the relevant year, pay from a non UK resident employer and not borne by a UK permanent establishment), the strict PAYE requirements may be relaxed if the criteria and information requirements are met.

For internationally mobile employees, CWG2 says that from 6 April 2025 the business can make an online notification to HMRC specifying a proportion of an uncertain payment that is not PAYE income, for example because it relates to duties abroad or is likely to be treaty relieved. For qualifying new residents the excluded proportion is capped at 30%. Without a valid notification, the entire payment is treated as PAYE income. Our page on overseas workday relief explains the related relief for new arrivals.

What does this look like in practice?

Illustration only. A German parent company seconds an engineer to its UK subsidiary for three years. She stays on the German payroll, is paid in euros, and the parent recharges her cost to the UK company. The German company has no UK branch.

The UK subsidiary is the relevant person under section 689. It must set up a payroll record, report her earnings converted to sterling on each FPS, and pay the UK tax.
Her German salary and any benefits the parent provides, such as housing, are part of the earnings the UK company must capture, whatever the recharge says.
If her contract promises a net salary with UK tax met by the group, the PAYE amount is grossed up under section 689(3)(a); see tax equalisation for mobile employees for the modified PAYE arrangement that groups often use.
National Insurance turns on whether she holds a certificate of coverage for German contributions. If she does, no UK Class 1 is due for that period.

What happens if the UK business does nothing?

PAYE81620 notes that UK businesses often do not realise they have these responsibilities, especially when the overseas company pays the staff. PAYE81710 describes HMRC’s approach where a business refuses: HMRC write specifying a date from which PAYE should operate, set up an employer record, and can make determinations under regulation 80 of the PAYE Regulations for the unpaid tax, without waiting for the tax year to end. A determination is an assessment on the UK business itself, so the tax becomes its own debt. These cases often surface in an HMRC employer compliance check.

What are the common mistakes?

Assuming that because the overseas company pays, the overseas company is responsible. Under section 689 the UK business carries the PAYE duty.
Running PAYE on the recharge amount rather than on the employee’s actual earnings.
Forgetting benefits provided abroad, such as home leave flights or tax return fees, which still need to go through payroll or onto a P11D.
Overlooking employer National Insurance as host employer under the categorisation regulations.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.