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The overseas workdays relief (OWR) regime is being reformed, as part of the wider changes to the taxation of non-domiciled taxpayers. The reforms remove the need to keep the relevant employment income offshore, extend the maximum OWR period from three to four tax years of residence and apply an annual cap to the amount of relief available.
Currently, eligible employees who are non-UK domiciled and taxed on the remittance basis can obtain a deduction from their taxable employment income in respect of earnings related to duties performed outside the UK, provided the income is paid outside the UK and not remitted here. Generally, this relief is available for the first three years of UK tax residence.
Under the new regime, OWR will still be available in respect of income for duties performed overseas but for a longer period of up to the first four tax years of residence. Anyone qualifying for the new foreign income and gains (FIG) regime with overseas employment duties will be eligible for the relief by election, irrespective of domicile status or whether the employment income is retained offshore. The amount of OWR will be capped at the lower of 30% of qualifying employment income as defined and £300,000 per tax year.
Transitional rules will allow employees who are claiming OWR prior to 6 April 2025 but are ineligible for the new FIG regime to claim OWR to the end of their third tax year of residence, while those who are eligible under both regimes will be able to claim OWR for four tax years. The annual £300,000/30% cap on relief will not apply to such individuals. OWR on trailing income related to a pre-2025/26 tax year will still be subject to the prior remittance basis rules, so must be paid and retained outside the UK to benefit from relief.
An election for OWR must be made on a self-assessment tax return, by the normal 31 January filing deadline. The election will entail loss of both the income tax personal allowance and capital gains tax annual exemption.
A simplified process for operating OWR through payroll has also been announced, requiring only a notification and an auto-acknowledgment, in place of the need to wait for review and approval by HMRC.
UK resident taxpayers who are not UK domiciled and/or qualify for the new FIG regime from 6 April 2025 on non-UK income and gains.
The new regime will be effective from 6 April 2025.
Many taxpayers may enjoy additional relief as a result of the extension of OWR to four years of tax residence. Additionally, those who would not previously have qualified for OWR but will qualify for the new FIG regime (such as UK domiciled individuals returning after extensive periods outside the UK) may benefit considerably from the reforms.
Other taxpayers, including high earners and those with extensive overseas duties, will receive lower levels of relief due to the new annual cap. Nonetheless, many expat employees will welcome the simplification of some aspects of the regime. In particular, the extension of the relief to four years, aligning with the wider FIG regime, and the abolition of the onerous requirements to track remittances and structure bank accounts will be a relief to many.
Employers will welcome the greater flexibility to apply OWR through payroll, while those who operate tax equalisation policies for their mobile employees may also appreciate the greater certainty the removal of remittance rules provides in estimating tax costs of assignments to the UK. However, many employers and employees would have wished for further reform, perhaps removing the need for duties to be performed overseas for relief to be available. Maintaining a specific tax inducement for overseas travel may also continue to have environmental impacts that employers may wish to consider as part of their travel policies.