Working in the UK for a Kiwi or Aussie Employer

"I'm doing Australian work, for Australian clients, in an Australian setting. I'm not really doing anything in the UK besides using an internet connection."

That was a lawyer from Sydney, a few months into a stint in London, still on his old firm's payroll and still watching Australian tax come off his pay every week. It's a fair instinct. It's also wrong, and it's the single most common wrong thing we hear at the moment.

Two days earlier we'd had almost the same call from a researcher at a New Zealand university, whose employer had kindly agreed to keep her on while she and her husband were looking to live in the UK for a year. Their position was roughly "we'll keep paying you as we are now, you sort out any UK taxes". When she asked them to stop deducting New Zealand PAYE, they told her they were obligated to carry on. A few hours after that, an Australian three weeks off the plane, still on his old employer's books, wondering why he couldn't get anywhere with childcare funding.

Three calls in five days, all the same problem. One of them told us she'd been searching for months before she found the answer. So let's put it somewhere findable.

Where you sit is where the work happens

Here's the rule that decides almost everything else. Employment duties performed physically in the UK are UK duties, from the first substantive day of work.

Not from day 90. Not from day 183. From the day you sit down at a desk in Wandsworth and start doing your job.

That stays true when the contract is with a Melbourne company, when the salary lands in a CommBank account in Australia, when every client you touch is Australian, and when your employer has never had so much as a UK PO box. None of those facts move your desk. HMRC's starting point is that pay is taxable where the employment is exercised, and "exercised" means where the person doing it is physically sitting. Working online doesn't relocate your duties to wherever the server or the customer happens to be.

Being inside the UK tax net isn't the same as having a UK tax bill, though. That's where the treaty comes in, and where a lot of half-heard advice goes wrong.

The genuine exception: a real short trip

But hang on. Lots of people come to the UK for meetings, conferences, work trips where their employer is outside of the UK. Does this mean they must also pay UK taxes for any work "performed" on UK soil? Thankfully not - there is a proper exemption in both the UK–Australia and UK–New Zealand double tax agreements, and it's more generous than most people expect. It just isn't the thing people think it is.

It is not "the first 183 days are free". It's a set of conditions that all have to hold at once. Before you get to them you have to be a resident of Australia or New Zealand for treaty purposes, which is a separate question from who employs you. Your treaty residence is where your main life is - the country where your deepest personal, family, and financial roots are grounded when two tax systems both claim you. If your treaty residence is NZ / Australia, then all three conditions below must be true to ensure the work you perform in the UK is not taxed in the UK:

1. The day count. No more than 183 days of physical presence in the UK across the relevant twelve-month period.
2. A genuine foreign employer. Your pay comes from, or on behalf of, an employer that isn't UK resident, and no UK business is functioning as your employer in substance. A UK company that directs your day-to-day work, absorbs your salary cost and treats you as part of its team can fail this one for you, even though your payslip still says Sydney.
3. No UK permanent establishment bearing the cost. Your remuneration isn't borne by, or deductible against, a UK permanent establishment of your employer.

Get all of that right and something surprising follows: a 180-day assignment in London can be entirely free of UK income tax, even if you did substantive work on every one of those days. The treaty treats the arrangement as a temporary export of an Australian or New Zealand job rather than a job taken up here.

BUT, three things then trip people up.

1: The calendars aren't the same. Treaty days count any part of a day in the UK, including arrival, departure, weekends, holidays and the week you spent in Cornwall doing nothing. Residence days under the Statutory Residence Test generally count midnights. Workdays are a third ledger again. Someone with 175 UK workdays and 20 weekends here has 195 treaty days, not 175.

2: Day 184 bites backwards. If a continuous assignment tips over the limit, the condition wasn't met, and the UK can generally tax the pay for those UK duties from the beginning. Tax doesn't politely start accruing on day 184.

3: And here is the BIG one - the exemption rarely survives an actual move. Rent a flat, bring the family, take on the ordinary trappings of a life here, and you're likely to be UK tax resident well before you get to 183 days. In fact it would be very hard to live and work in the UK for 180 days and NOT become a UK tax resident. Once you become UK tax resident, all work you perform in the UK (actually all your worldwide income) becomes taxable in the UK, and that is from the day you arrive.

You've moved. Now what?

If you've relocated and you're doing your normal job from a UK address, the UK taxes that salary. Your employer has no UK payroll, so there's usually nobody who can operate PAYE for you. Which leaves a slightly odd-looking solution: you run the payroll yourself.

These are HMRC's direct payment schemes, and the shorthand is that you become your own employer (not in a legal sense). You remain an employee, with the rights and holiday pay that go with it of your employer back home. What changes is that you take on the calculating, reporting and paying each month. You get an employer PAYE reference of your own, and you employ exactly one person.

There are two main flavours that we have seen:

1. DPNI collects PAYE income tax and employee National Insurance together.
2. DCNI collects employee National Insurance only, with the tax picked up through Self Assessment after the year end.

You don't get to pick. You contact HMRC, explain the arrangement, and HMRC decides which one fits. In our experience clients in this position have mostly ended up on DCNI, paying National Insurance monthly and squaring the tax up at the end of the year. Allow around six weeks for the paperwork, and don't panic if you're already a few months in. Backdating and late filings are normal here, and HMRC is used to it.

Two useful things to know. Your overseas employer generally has no UK employer's National Insurance to pay, which is why these schemes exist, so you can reassure them on that. And if you'd rather sidestep the lot by switching to a contractor arrangement, check first: plenty of professions, law among them, simply don't allow it. That was the Sydney lawyer's problem. Where it is open to you, a limited company is a different conversation with different answers.

The shortcut, and why HMRC pushes back

Here's what a lot of people do instead. Leave the home payroll running, report the salary on the UK tax return as foreign income, claim credit for the tax already deducted at home, and pay any difference. Tempting, but not the right way to do it, and it can come apart.

Employment salary is employment income. It belongs on the employment pages, not tucked into the foreign section as though it were bank interest. More to the point, HMRC only gives credit for foreign tax that was properly due under the other country's law and consistent with the treaty. We've watched this play out. An Australian in exactly this position claimed credit for the Australian tax withheld, and HMRC's answer was, in effect: you shouldn't have been paying tax in Australia at all, we're not recognising that credit, pay us the full amount and go and get your money back from the ATO.

Two more catches. Foreign tax credit offsets UK income tax and does nothing at all for National Insurance, which on the shortcut route you haven't been paying either. And a credit sorts out the legal double taxation eventually. It does not sort out the cashflow.

What double withholding actually costs you

Numbers make this concrete. Take a salary of NZ$66,000, which at 2.2 to the pound is about £30,000. Let's say the NZ employer continues to (incorrectly) deduct NZ PAYE from the monthly payslip, for a person who has moved to the UK for a year and who continues on as an employee of the New Zealand company.

Run properly through the UK, that's a personal allowance of £12,570, leaving £17,430 taxed at 20%, so £3,486 of income tax. Employee National Insurance at the main 8% rate on the same slice adds about £1,394. Call it £4,880 all in.

Meanwhile New Zealand PAYE on NZ$66,000 is roughly NZ$12,000, or about £5,450, and it's coming off every payday from the moment you land.

So over a year you've had about £10,300 taken out of a £30,000 salary. More than a third of it. The bill that should have been paid is £4,880, and the difference comes back to you some time after the UK tax year ends on 5 April, after the return is filed, and after the NZ tax office processes the claim. That's a long time to be short.

One helpful thought: arrive part way through a UK tax year and leave part way through another, and you get the £12,570 allowance twice. On a one or two year stint that often means a much lower UK income tax bill once the dust settles. The National Insurance is still real, though, and you pay that on every payslip.

The conversation to have with payroll

Most people don’t want to pick a fight with their employer over tax, and you shouldn’t need to.

Don’t open with: “I live in the UK now, so please stop the tax.” In our experience, payroll teams in New Zealand and Australia generally aren’t trying to be difficult. They’ve probably never dealt with this situation before, and their payroll software may not give them an obvious way to handle it.

Start by giving them the facts: when you left, your first UK workday, how long you expect to remain in the UK, your anticipated tax residency status both at home and the UK, and how you’re proposing to deal with UK tax.

Then ask them to help you understand how they’re treating the arrangement. The useful questions are:

1. Is payroll continuing to treat me as resident and taxable in New Zealand or Australia? If so, what is that based on?
2. Is the continued withholding legally required, or is it because of how the payroll system is currently set up?
3. Is there a variation, tailored tax code or refund process that could apply in my situation?

It’s worth getting the reply by email. That isn’t about building a case against your employer. It simply gives you, payroll and your tax adviser a clear record of the position - and avoids everyone working from a different version of the conversation.

That third question can be useful. New Zealand employees can apply to Inland Revenue for a tailored tax code. Australian employers have a standing ATO variation that may allow them to reduce PAYG withholding to take foreign tax into account. Neither happens automatically, so the possibility may not come up unless you ask.

When they still say no

Sometimes they just won't move, and that's the situation most people reading this are actually in. It isn't fatal.

Get your UK side right first. That's the part you control, and it's the part HMRC will look at. Set up the appropriate direct payment scheme, pay the National Insurance monthly, file the Self Assessment return and pay whatever's due. Then reclaim at the other end in NZ / Australia.

For New Zealand, that reclaim can be stronger than people expect. New Zealand tax residency ends when you have no permanent place of abode there and you've been away more than 325 days in a twelve-month period. A rental property tenanted out at arm's length isn't a place you can walk back into, so it generally doesn't keep you resident. Satisfy both limbs and your non-residence can be backdated to the day you left, which turns "my employer withheld tax they shouldn't have" into a clean refund claim. That's a conversation with Inland Revenue rather than with payroll, and in our experience it tends to be processed without too much hassle.

For Australia there's no simple day count that ends your residency, and if you're only gone a year or two you may well still be Australian resident. That's fine. It just means Australia keeps taxing you and gives credit for the UK tax rather than stepping aside entirely. Clients who've approached the ATO have generally found them reasonable about the sequencing once the UK position is documented.

The bottom line

Strip it back and it's one idea. The country you're sitting in when you do the work gets first go at taxing it. Everything else is mechanics: which scheme collects it, who's owed a refund, and how long you're out of pocket in between.

If you're moving, or you've just landed:

1. Work out where you are for tax, properly, before you tell payroll anything.
2. Keep three day counts from day one: treaty days, residence days and workdays.
3. Sort the UK collection route early rather than at the end of the year.
4. Ask payroll for their reasoning in writing, and ask about a variation or tailored code.
5. Assume you'll be double-withheld for a while, and hold some cash back for it.
6. Reclaim at home once the UK position is documented and paid.

None of this is difficult once someone's mapped it out. It's just obscure, which is why people spend months searching before they find anyone who deals with it.

If your employer at home won't stop deducting and you're not sure where that leaves you, get in touch with No Worries Accounting. We've been guiding Kiwi and Aussie contractors and employees through the UK tax system for over twenty years, we set up and run these direct payment schemes for clients every month, and we handle the UK personal tax return that wraps it all up at the end of the year. If you haven't got one yet, here's how to register for a UTR to get you started.