HMRC recently announced that effective 6 April 2025, if new Section 690 provisions apply to an employee during a tax year, the employer can notify HMRC of their intention to treat part of any uncertain payment as not being pay-as-you-earn (PAYE) income and implement the arrangement through payroll as soon as acknowledgement of the application is received from HMRC.
The UK recently finalised Finance Bill 2024–25, which passed through the House of Lords on 19 March 2025 and received Royal Assent on 20 March 2025. The legislation, which is applicable for the new tax year that started on 6 April 2025, introduced a number of significant changes, including the abolition of the long-standing ‘non-domiciled’ tax regime. On a more practical note, the legislation also made changes to a commonly used arrangement with HMRC to mitigate PAYE payroll withholding tax requirements in certain circumstances.
Historically, section 690 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) provided that employers may request a direction from HMRC to operate PAYE on a percentage of an employee's remuneration, giving employees relief from being taxed on remuneration not attributable to their UK workdays.
HMRC has now launched a new application process, effective 6 April 2025, whereby employers are allowed to operate PAYE on the estimated income attributable to UK workdays (only) as soon as HMRC acknowledges receipt of the application. These applications are made under new sections 690A and 690D of ITEPA 2003.
However, new submissions must be made prior to the April payroll operation to implement these arrangement for the 2025/26 tax year. The circumstances in which these arrangements can be used, the changes to the process, and some things to think about are discussed below.
By default, HMRC expect UK employers to withhold PAYE via payroll on 100% of an employee’s cash remuneration. In certain circumstances, HMRC will allow PAYE to be operated on a reduced portion of an employee's income based on the amount of income expected to be taxable in the UK, if the employee is:
The new legislation now sets out different categories of section 690 applications; the employer must determine the correct legislative basis for the application. These categories of application are both currently made using the same form, but the type of application must be declared in the submission.
Up until 5 April 2025, it was possible to apply in advance for a section 690 direction to cover up to three tax years in one application; however, it is no longer possible to make an application covering multiple tax years. A new application must be submitted for each relevant tax year, after the tax year has already started, but prior to the first month’s payroll operation to be fully compliant in operating the arrangement.
Any previously approved section 690 arrangements are now considered invalid from 6 April 2025. Therefore, any preapproved advance applications for multiple tax years are no longer effective and new applications must be submitted for 2025/26 and future tax years.
The information required in the application is similar but slightly different than what used to be required. HMRC guidance regarding information required should be considered to gather the information prior to the preparation and submission of the application. It now appears to be more significant to ensure that information in the application matches employer payroll records to minimise issues with electronic processing.
Historically, employers formally had to await HMRC approval of the section 690 arrangement, and frequently experienced lengthy processing delays. Under the new process, when the online application is submitted, HMRC will acknowledge and confirm receipt of the notification, which will allow the employer to operate PAYE on a reduced basis with immediate effect. HMRC explicitly reserves the right to check the basis of the application and amend its approval or status later.
Additional applications may be made for the same employee within the tax year, if the employee’s circumstances change; for example, if the portion specified is no longer correct or if the expected tax residence position changes.
Employers should prioritise identifying employees who should have a reduced PAYE arrangement in place for the 2025/26 tax year, which may include new employees or those who previously had such arrangements in earlier tax years. Applications should be submitted to HMRC as soon as possible, and ideally prior to the operation of the April 2025 payroll in the UK if employers wish to operate the reduced PAYE arrangement from the beginning of the tax year.
Employees whose payroll is operated on a reduced PAYE basis are required to file an annual UK tax return to reconcile the final amount of taxable earnings, compared to the estimated portion reported via payroll under the section 690 arrangement. The new application process does not change this requirement.
The new Foreign Income and Gains (FIG) tax regime for qualifying new residents in the UK -- also effective from 6 April 2025 -- provides for a new OWR regime. Going forward, financial limits may apply to OWR claims, which may also impact the percentage to be utilised in the section 690 reduced PAYE arrangement, so careful consideration will be required in such cases to avoid excessive claims for tax relief via payroll.
For more information on the process of making applications and related payroll operations, please consult your regular BDO contact or the authors of this article.
Andrew Kelly
Steph Carr
BDO in United Kingdom
The UK recently finalised Finance Bill 2024–25, which passed through the House of Lords on 19 March 2025 and received Royal Assent on 20 March 2025. The legislation, which is applicable for the new tax year that started on 6 April 2025, introduced a number of significant changes, including the abolition of the long-standing ‘non-domiciled’ tax regime. On a more practical note, the legislation also made changes to a commonly used arrangement with HMRC to mitigate PAYE payroll withholding tax requirements in certain circumstances.
Historically, section 690 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) provided that employers may request a direction from HMRC to operate PAYE on a percentage of an employee's remuneration, giving employees relief from being taxed on remuneration not attributable to their UK workdays.
HMRC has now launched a new application process, effective 6 April 2025, whereby employers are allowed to operate PAYE on the estimated income attributable to UK workdays (only) as soon as HMRC acknowledges receipt of the application. These applications are made under new sections 690A and 690D of ITEPA 2003.
However, new submissions must be made prior to the April payroll operation to implement these arrangement for the 2025/26 tax year. The circumstances in which these arrangements can be used, the changes to the process, and some things to think about are discussed below.
Section 690 Arrangements
By default, HMRC expect UK employers to withhold PAYE via payroll on 100% of an employee’s cash remuneration. In certain circumstances, HMRC will allow PAYE to be operated on a reduced portion of an employee's income based on the amount of income expected to be taxable in the UK, if the employee is:
- Non-resident in the UK;
- UK resident and eligible for split-year treatment and has overseas earnings in the overseas part of the split year;
- Treated as non-resident in the UK under a double taxation agreement; or
- UK resident and eligible for Overseas Workday Relief (OWR).
Key Changes
The new legislation now sets out different categories of section 690 applications; the employer must determine the correct legislative basis for the application. These categories of application are both currently made using the same form, but the type of application must be declared in the submission.Up until 5 April 2025, it was possible to apply in advance for a section 690 direction to cover up to three tax years in one application; however, it is no longer possible to make an application covering multiple tax years. A new application must be submitted for each relevant tax year, after the tax year has already started, but prior to the first month’s payroll operation to be fully compliant in operating the arrangement.
Any previously approved section 690 arrangements are now considered invalid from 6 April 2025. Therefore, any preapproved advance applications for multiple tax years are no longer effective and new applications must be submitted for 2025/26 and future tax years.
The information required in the application is similar but slightly different than what used to be required. HMRC guidance regarding information required should be considered to gather the information prior to the preparation and submission of the application. It now appears to be more significant to ensure that information in the application matches employer payroll records to minimise issues with electronic processing.
Historically, employers formally had to await HMRC approval of the section 690 arrangement, and frequently experienced lengthy processing delays. Under the new process, when the online application is submitted, HMRC will acknowledge and confirm receipt of the notification, which will allow the employer to operate PAYE on a reduced basis with immediate effect. HMRC explicitly reserves the right to check the basis of the application and amend its approval or status later.
Additional applications may be made for the same employee within the tax year, if the employee’s circumstances change; for example, if the portion specified is no longer correct or if the expected tax residence position changes.
Things to Consider
Employers should prioritise identifying employees who should have a reduced PAYE arrangement in place for the 2025/26 tax year, which may include new employees or those who previously had such arrangements in earlier tax years. Applications should be submitted to HMRC as soon as possible, and ideally prior to the operation of the April 2025 payroll in the UK if employers wish to operate the reduced PAYE arrangement from the beginning of the tax year.Employees whose payroll is operated on a reduced PAYE basis are required to file an annual UK tax return to reconcile the final amount of taxable earnings, compared to the estimated portion reported via payroll under the section 690 arrangement. The new application process does not change this requirement.
The new Foreign Income and Gains (FIG) tax regime for qualifying new residents in the UK -- also effective from 6 April 2025 -- provides for a new OWR regime. Going forward, financial limits may apply to OWR claims, which may also impact the percentage to be utilised in the section 690 reduced PAYE arrangement, so careful consideration will be required in such cases to avoid excessive claims for tax relief via payroll.
For more information on the process of making applications and related payroll operations, please consult your regular BDO contact or the authors of this article.
Andrew Kelly
Steph Carr
BDO in United Kingdom