Foreign Tax Credit Relief for Employees

If you employ someone who pays tax both in the UK and in another country on the same earnings, you may be able to claim foreign tax credit relief (FTCR) on their behalf through your payroll. This allows you to offset the foreign tax they've paid against the UK tax due under PAYE, preventing them from being taxed twice on the same income. To do this, you'll need approval from HMRC to operate what's known as an "Appendix 5 arrangement".

Who can claim foreign tax credit relief

You can apply to operate foreign tax credit relief if you:

• Send an employee to work abroad
• Continue to deduct UK PAYE using your employee's UK tax code
• Are required to deduct foreign tax from your employee's pay

The employee can only claim relief up to the amount of Income Tax they would have been liable to pay in the UK. In other words, they cannot get a refund for foreign tax that exceeds their UK tax liability.

You should check the list of tax treaties between the UK and the country where your employee will be working to find out whether you need to deduct foreign tax from their pay. Even if the country does not have a tax treaty with the UK, your employee may still be able to claim foreign tax credit relief.

Once your business has authority from HMRC to apply foreign tax credit relief for an employee in a particular country, you can extend this relief to any other employees you send to work in that country. You must include details of these additional employees in your quarterly updates to HMRC.

How to apply for authority to operate FTCR

Before applying, you must check that your employee qualifies for foreign tax credit relief. You should also ensure your payroll software is compatible and can report "Net of Foreign Tax Credits" on your Full Payment Submission (FPS).

To apply, send a letter to:

HMRC

Queensway House

Stewartfield Way

Peel Park

East Kilbride

United Kingdom

G79 1AA

Your application letter must include:

• The country the employee is going to work in (including if the work is carried out offshore on the UK Continental Shelf)
• Confirmation that you are required to withhold foreign taxes from your employee's earnings
• Confirmation that your payroll software is compatible and can report Net of Foreign Tax Credits on your FPS (you can also provide the name of your software provider)
• The name and National Insurance number of the employee going abroad
• Confirmation of the tax year the application is for

HMRC cannot accept applications for a previous or closed tax year, so you must apply in advance for the relevant tax year (for example, 2025/26).

After your application is approved

You will receive a letter from HMRC confirming whether your application for an Appendix 5 arrangement has been accepted.

Once approved, you must:

• Offset any foreign tax deducted against UK tax due under PAYE when you pay your employee
• Continue to report PAYE while the employee is abroad
• Continue to deduct National Insurance contributions as normal
• Deduct any additional UK tax due (if the foreign tax is less than the UK tax liability)
• Provide updates to HMRC every 3 months about the status of your employees

Quarterly reporting requirements

Every 3 months, you must contact HMRC with an update about your employees who claim foreign tax credit relief. This applies even if no employee details have changed.

Send your update letter to:

Appendix 5 Team

PAYE and Self Assessment

HM Revenue and Customs

BX9 1AS

Your update letter should include:

• Your name and contact details
• The name of your business
• The names and National Insurance numbers of employees who claim foreign tax credit relief
• Details of any employees who have left the company
• Details of any employees who no longer work abroad
• Details of any new employees working in a country where you have a foreign tax relief agreement
• Confirmation that no employee details have changed (if applicable)

Failing to provide these quarterly updates can result in your employee's records becoming inaccurate, which may lead to amended tax codes or incorrect underpayment calculations.

Year-end reporting

After 5 April each year, you must complete and return a year-end form reporting the foreign tax credit relief you've operated during that tax year.

Download and complete the "Request for EP Appendix 5 Net of Foreign Tax Credit Relief information" form, including:

• Employee's name and date of birth
• Employee's National Insurance number
• Name of your company and PAYE reference
• Employee's total earnings for the tax year
• Amount of UK tax deducted from the employee's earnings
• Which countries the employee worked in during the tax year
• The amount of foreign tax paid
• Amount the employee earned while working abroad

Send the completed form to:

Appendix 5 Team

PAYE and Self Assessment

HM Revenue and Customs

BX9 1AS

You should keep copies of your reports for at least 4 years.

National Insurance contributions

It's important to note that foreign tax credit relief only applies to Income Tax. You must continue to report PAYE and deduct National Insurance contributions as normal for employees working abroad, regardless of whether they receive foreign tax credit relief.

Sources

• Check if your employee can claim foreign tax credit relief
• Apply to operate foreign tax credit relief
• Report foreign tax credit relief

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.