HMRC clarifies tax treatment of deferred remuneration

Deferred remuneration is earnings paid for a prior period, such as bonuses or payments made under a long-term incentive plan. It is deferred because it is paid significantly later than the earnings or performance period to which it relates, not just in arrears like salary.

New guidance published by HMRC (INTM163155) provides much-needed clarity on the income tax position where an individual’s tax treaty residence has changed between earning the remuneration and receiving the payment. The national insurance position is considered in an earlier article.

Background

Under UK tax legislation, all general earnings for a tax year are brought within the scope of the charge to income tax where an employee is UK tax resident (with the exception of earnings that are excluded due to split year treatment). General earnings are taxable in the tax year they are received, which is usually the earlier of when the employee becomes entitled to the remuneration and when it is paid.

For an employee who is UK resident and working solely in the UK, receiving remuneration for a prior period should not cause any complications, although their effective tax rate may have changed by the time they receive the payment. However, for those who have carried out some of the employment abroad or assumed tax residence elsewhere for some of the relevant period, consideration needs to be given to the terms of the relevant double tax agreement (DTA) in order to determine whether the UK has the right to tax this income.

The OECD Model Tax Convention

The majority of the UK’s DTAs with other countries are based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. Article 15 of the convention concerns employment income, also known as dependent personal services. INTM163155 clarifies HMRC’s interpretation of the Article’s definition of the term “a resident of a contracting state” as it relates to employment income.

Article 15 establishes the general rule that income from employment (salaries, wages and other similar remuneration) is taxable only in the state of residence unless the person has carried out duties in another state (the source state), in which case remuneration relating to those duties is taxable in the source state.

However, paragraph 2 of Article 15 provides that “remuneration derived by a resident of a Contracting State” is taxable in that state only where the following conditions are met:

• the recipient is present in the source state for no more than 183 days in total in any twelve-month period commencing or ending in the fiscal year concerned;
• the remuneration is paid by, or on behalf of, an employer who is not a resident of the source state; and
• the remuneration is not borne by a permanent establishment which the employer has in the source state.

This treaty exemption will be familiar to those working with globally mobile populations or cross-border workers. It is also clear that “resident” in this context is defined as tax treaty resident in accordance with the terms of the treaty being assessed. However, the concern here is how to interpret the definition of “resident of a Contracting State” in order to access the exemption the treaty provides.

There has been longstanding debate as to whether this “residence” refers to:

• the individual’s tax treaty residence position at the time of payment; or
• the individual’s tax treaty residence position throughout the earnings period, which in some cases could span multiple jurisdictions.

Welcome clarification

HMRC has now confirmed that in its view, the taxing rights are determined by the individual’s treaty tax residence at the time the payment is received. The guidance also includes useful examples outlining scenarios in which the UK does and does not have taxing rights.

This question originated as a query (Question 36) to the former Joint Forum on Expatriate Tax and National Insurance contributions in relation to the application of the then new UK-UAE double tax treaty, though equally applies to any treaty based on the OECD model tax treaty convention. There was support from HMRC internally for both interpretations and evidence of compliance checks being conducted on each basis. As such, the matter has required lengthy consideration by HMRC’s internal treaty team to reach a conclusion.

The OECD commentary is clear that the source state does not change (ie, where the work was carried out at the time the duties were performed) but the state of residence could be different at the point the income was earned and the payment is received. Therefore, if the UK is not the source state, HMRC’s view is that the UK only has taxing rights on the deferred income under the treaty if it is the state of treaty residence at the time the payment is received by the taxpayer.

The one exception to this is if there is a “subject to tax clause” in the treaty concerned. In such cases the treaty only restricts the other country from taxing an individual if the other country has exercised its taxing rights. It is therefore possible that in some rarer circumstances the UK still has the right to tax an individual on deferred remuneration despite the UK neither being the state of source nor of residence at the time of payment.

Practical difficulties

It is important to bear in mind that not all the UK’s DTAs follow the OECD Model Tax Convention and therefore the actual wording of the relevant treaty should always be consulted when considering its application. If there is no DTA between the UK and the other country, it may be possible for the taxpayer to claim unilateral relief instead. If the taxpayer has already overpaid UK income tax in light of this new guidance, a claim for repayment should be made via a self assessment tax return rather than as an overpayment relief claim.

Furthermore, the national insurance (or other social security) position may not align with the income tax position under the DTA. Recently issued HMRC guidance on national insurance for globally mobile advises that national insurance should be apportioned in line with social insurance period and is not dependent on social security liability at the point the payment is made. This is considered in detail in an earlier article.

Different legislation and reciprocal agreements govern income tax and social security so the positions may conflict and need to be considered separately. If the other country to the treaty does not agree with HMRC’s position, the Mutual Agreement Process (MAP) process can be invoked to test the assessment, though should not be considered a first resort. The OECD Manual on Effective Mutual Agreement Procedures has recently been rewritten and published.

Further changes ahead

HMRC has issued this guidance at a time when globally mobile and cross border working is becoming ever more widespread and the rules governing the taxation of such arrangements are being scrutinised. The OECD launched a public consultation on global mobility in November 2025 and subsequent discussions have centred on whether Article 15 and its intentions are still fit for purpose when applied to modern working arrangements.

Possible reform may therefore be on the horizon; nonetheless it is useful to have HMRC’s clarification of its viewpoint in relation to taxation of deferred remuneration as it currently stands.

Adelle Greenwood, Technical Manager – Employment Taxes and National Insurance Contributions