What is split payroll and how does it work in the UK?

When employees work in the UK but are also paid from another country, employers may need to operate a split payroll to ensure tax obligations are handled correctly in each jurisdiction.

What is split payroll?

Split payroll is a strategic cross-border arrangement where an employee’s compensation is physically disbursed through multiple international payroll systems to match their global work footprint. It acts as a dual-compliance tool, facilitating local currency payments for the employee’s living costs while ensuring the employer meets "real-time" tax and social security obligations in every country where work is physically performed.

It is typically used when:

• An employee works across multiple countries

• A portion of salary is paid in the UK and another abroad

• Tax obligations exist in more than one jurisdiction

💡 Good to know: Unlike shadow payroll, split payroll involves actual payments being made in multiple countries.

How does split payroll work in the UK?

Split payroll works by dividing an employee’s income between countries and applying local tax rules to each portion. Employers first determine how much income is taxable in the UK versus abroad, usually based on physical workdays and tax residency. Each payroll then processes its own portion of the salary using local rules and pay frequencies, and once the UK share of income is identified, employers must apply the correct UK tax and reporting rules:

• Income Tax (PAYE): Applied based on the employee’s UK tax code, or adjusted under a Section 690 notification where HMRC has agreed that only the UK workday portion should be subject to PAYE.

• National Insurance contributions (NICs): Calculated on UK earnings unless an A1 Certificate or Certificate of Coverage confirms that social security remains in the home country instead.

• RTI submission: Report the UK portion of the split payroll to HMRC via a Full Payment Submission (FPS) on or before each payday, using the ‘estimated pay’ flag if exact foreign figures are still pending.

• Tax treaty alignment: Apply any relevant Double Taxation Agreements (DTAs) and Foreign Tax Credit Relief (FTCR) to prevent the same income being fully taxed twice and to align the UK position with the other jurisdiction.

When is split payroll used?

Split payroll is used when an employee performs work in more than one country and needs part of their salary paid locally to meet living costs, tax, or social security obligations in each jurisdiction.

 It is primarily used to provide employees with local currency for daily expenses (like rent) while maintaining home-country contributions (like pensions or mortgages). In 2026, this is increasingly critical for senior executives and cross-border commuters to prevent "double-withholding" tax. By allocating income based on physical workdays in each territory, it ensures "real-time" accuracy and avoids the administrative burden of reclaiming overpaid taxes from multiple government agencies at year-end.

💡 Good to know: Split payroll is often used alongside global mobility programmes and tax equalisation policies, so payroll, HR and tax teams should coordinate closely when designing assignments.

How do you set up and implement split payroll?

Split payroll combines how income is split between countries with how each part is processed and reported. You need a clear method for allocating income, coordinated payrolls in each country, and UK tax rules applied correctly to the UK portion.

In practice, employers should:

• Confirm the employee’s tax residency and which countries can tax their income.

• Split income based on physical workdays and duties in each country.

• Run payroll in each jurisdiction for its share of salary, bonuses and benefits.

• Use UK tools such as Section 690 notification where needed so PAYE only applies to UK‑taxable income.

• Maintain a clear audit trail and review the setup when work patterns or residency change.

What is the difference between split payroll and shadow payroll?

Split payroll divides an employee's salary between multiple countries; shadow payroll is for reporting only. They are often confused, but serve different purposes.

To better understand the distinction, the table below compares how each approach works in practice.

⚠️ Warning: Because split payroll directly affects how employees are paid, accuracy in income allocation and tax treatment is critical for avoiding double taxation and HMRC queries.

What is a Section 690 notification?

A Section 690 notification

is an HMRC direction that allows employers to apply PAYE only to the portion of an employee’s earnings that relates to UK duties, rather than to their full global salary.

It is typically used in split payroll situations where:

• The employee is expected to spend a significant part of the tax year working outside the UK.

• The income relating to those overseas duties is not subject to UK Income Tax under the relevant rules or tax treaties.

• National Insurance contributions (NICs) may still be due on all earnings unless an A1 Certificate or Certificate of Coverage confirms social security remains in another country.

💡 Good to know: A Section 690 notification is not automatic: employers must apply to HMRC for the direction, and it should be reviewed regularly to ensure it still reflects the employee’s work pattern and residence position.

What is split year tax treatment?

Split year treatment is a statutory concession that prevents an individual from being taxed as a full-year UK resident when they move countries mid-term. Without it, the UK’s "all-or-nothing" residency rules could unfairly tax your global income for the entire year, even if you only lived in the UK for a single month.

In a split payroll context, this creates two distinct tax "mini-years":

• The Overseas Part: You are generally taxed only on income earned from UK duties.

• The UK Part: You are taxed on your worldwide income as a standard resident.

For 2026, this treatment is a critical "safety valve" for relocating employees. It ensures that foreign salary earned before arriving in the UK (or after departing) is shielded from HMRC, provided you meet specific criteria under the Statutory Residence Test (SRT). This alignment is what allows a split payroll to function accurately, ensuring tax is only withheld in the jurisdiction where the residency actually sits at that moment.

What challenges and legal considerations are involved?

Managing a split payroll is a high-stakes balancing act where operational errors can quickly escalate into legal liabilities. The primary challenge is the Risk of Double Taxation; without a deep understanding of Double Taxation Agreements (DTAs), an employee could see tax withheld in two countries simultaneously, severely impacting their cash flow and morale. Additionally, Currency Fluctuations create a moving target for compliance; if the exchange rate shifts significantly between the payment date and the reporting date, it can lead to "phantom" underpayments that trigger HMRC red flags.

From a legal standpoint, the complexity goes beyond simple tax rates. Employers must navigate the "Treaty Residency" rules to determine exactly where National Insurance (NICs) or social security should be paid, as these do not always follow the same rules as Income Tax. Failing to align these with Employment Law in both jurisdictions (such as mandatory benefits or pension auto-enrolment in the UK) can expose the company to tribunal claims or heavy regulatory fines for non-compliance with local labour standards.

HMRC penalties for payroll errors

Errors in split payroll reporting can lead to financial penalties from HMRC, depending on the type and severity of the issue.

Employers may face:

• Late RTI submission penalties, which HMRC calculates with fixed monthly amounts that increase with the number of employees;

• Penalties for inaccurate reporting, based on HMRC’s behavioural penalties regime where careless, deliberate or concealed errors can lead to percentage-based charges on the underpaid tax;

• Interest charges on late PAYE payments, at HMRC’s current late‑payment interest rate;

• Penalties for late payment of PAYE, which increase if late payment becomes frequent;

• HMRC reviews or audits in cases of repeated non‑compliance.

💡 Good to know: HMRC may reduce penalties if employers can demonstrate that they took reasonable care and corrected any payroll errors promptly once identified.

What are best practices for managing split payroll?

Managing split payroll effectively requires strong coordination between payroll systems, clear tax allocation rules and ongoing compliance monitoring across jurisdictions.

Best practices include:

• Clearly defining how income is split between countries: Establish rules for allocating salary, bonuses and benefits between jurisdictions to avoid inconsistencies.

• Using a Section 690 notification where applicable: Apply for a Section 690 notification to ensure PAYE is only applied to the UK portion of income, preventing over-taxation.

• Aligning payroll cycles across countries: Synchronise pay periods and reporting timelines to reduce discrepancies and ensure accurate tax reporting.

• Maintaining visibility over total compensation: Track the full remuneration package across both payrolls to ensure correct tax treatment and reporting.

• Using payroll software to manage split payroll calculations and reporting: A centralised payroll solution can help allocate income correctly between jurisdictions, automate tax calculations and reduce the risk of manual errors.

• Monitoring exchange rates and currency impacts: Currency fluctuations can affect reported income, so consistent conversion methods should be applied.

• Reviewing tax residency and split-year treatment regularly: Employee tax status can change during the year, impacting how income should be taxed.

• Ensuring accurate reporting to HMRC and foreign tax authorities: Submit correct RTI reports and ensure alignment with international tax obligations.

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