Introduction: Why a Section 690 Direction Now Works Against You
A section 690 direction once solved a simple cash-flow problem for senior Americans running global desks from London. Furthermore, it did so quietly, for up to three tax years at a time. That world ended on 5 April 2025, and it changed again on 6 April 2026. Consequently, the executives who benefited most from the old regime are now the ones facing the largest unexpected bills.
The mechanism itself remains straightforward. Where an employer has a UK tax presence, PAYE applies to 100% of employment earnings by default. Therefore an American managing director who spends two days a week in New York suffers UK withholding on income Britain will never ultimately tax. A section 690 direction removes that distortion by letting the employer withhold on the UK portion only.
What a Section 690 Direction Actually Does
The notification does not grant relief. Instead, it changes the timing of withholding. The statutory relief still arrives through the Self Assessment return, and the notification merely delivers a provisional version of it through payroll each month. Importantly, that distinction is where almost every problem now begins.
Section 690 of the Income Tax (Earnings and Pensions) Act 2003 and the sections that follow it govern the process. Additionally, HMRC administers the regime through its PAYE manual rather than through negotiated agreements. As a result, the employer carries the estimate, and the employee carries the consequences.
Why a Section 690 Direction Matters More to Americans
Every other nationality in the City treats this relief as a UK payroll question. Americans cannot. Because the United States taxes citizens on worldwide income, the UK tax withheld each month is also the raw material for the US foreign tax credit. Therefore reducing UK withholding reduces the credit available on the same year's Form 1040.
The Section 690 Direction Became a Notification in April 2025
From 6 April 2025, HMRC scrapped the application-and-approval model entirely. Employers and agents now submit an online notification instead, and they may operate reduced PAYE the moment HMRC acknowledges receipt. The GOV.UK guidance on operating PAYE on a proportion of income sets out the required fields in detail.
Every Pre-2025 Section 690 Direction Ceased to Have Effect
Multi-year approvals issued before 6 April 2025 stopped working on that date. Consequently, any employer that failed to renotify reverted to withholding on 100% of earnings without warning. HMRC confirms the transitional position in PAYE81512, which covers the pre-April-2025 rules.
The Annual Renewal Nobody Diarises
A notification now lasts one tax year only. Therefore a new submission is required every April, for every eligible employee, in every year of eligibility. In our experience with London banking and private equity clients, this single administrative change causes more mid-year payroll shocks than the substantive rules do. Moreover, the failure is silent: payroll simply reverts to full withholding, and the employee notices in a payslip rather than a letter.
What the Notification Must Contain
The employer supplies the employee's residence status, National Insurance number, payroll identifier and secondment details. Critically, it must also state a reasonable estimate of the proportion of earnings that will not be PAYE income. That estimate is the employer's judgement, not HMRC's, and an aggressive figure creates a liability the employee ultimately settles.
The 30% Cap on a Section 690 Direction from 6 April 2026
The most important change to the regime took effect on 6 April 2026 and applies to the tax year running now. Where the employee is a qualifying new resident, the employer must check whether the proportion it wants to exclude exceeds 30%. If it does, the notification must be limited to 30%. HMRC published the measure in its policy paper on aligning PAYE notifications with the Overseas Workday Relief limit.
How the 30% In-Year Limit Bites
Genuine non-UK workdays frequently exceed 30% for a global desk head. Nevertheless, the notification cannot reflect reality above that ceiling. Accordingly, an executive with 45% overseas workdays now suffers PAYE on 70% of earnings, and the difference sits as a receivable against HMRC until the return is filed.
The £300,000 Limit HMRC Does Not Apply In-Year
Here lies the trap that competitor guidance consistently omits. Overseas Workday Relief itself is capped at the lower of 30% of qualifying employment income or £300,000 per qualifying year, under the financial limit explained in EIM43600. However, the £300,000 ceiling applies only when the employee claims on the Self Assessment return. The section 690 direction enforces the 30% test in payroll and ignores the cash cap entirely.
Why That Gap Produces a January Bill
Consider earnings above £1m. Thirty per cent of £1.4m is £420,000, so payroll may exclude that sum from PAYE. Meanwhile the return will only support £300,000 of relief. Therefore £120,000 of income escaped withholding that the statute never intended to relieve, and the shortfall crystallises as a balancing payment.
Treaty Non-Residents Joined the Regime
From 6 April 2026, the qualifying new resident rules in section 690D also extend to treaty non-resident employees. HMRC sets out the mechanics in PAYE81517. Consequently, executives relying on the residence article of the US-UK double taxation convention, a treaty the US Treasury publishes in full, now sit inside the same notification framework.
Who Qualifies for a Section 690 Direction
Eligibility is narrower than most senior hires assume. A section 690 direction is available where the employee is non-UK resident, is UK resident with split-year treatment and overseas earnings in the overseas part, is treated as non-resident under a double taxation agreement, or is a UK resident eligible for Overseas Workday Relief.
Qualifying New Residents and the Four-Year Window
Overseas Workday Relief now runs for four consecutive tax years and requires ten consecutive years of prior non-residence. HMRC explains the qualifying conditions in its Overseas Workday Relief guidance. Therefore an American who spent a single sabbatical year in London eight years ago may fail the test outright.
The Settled American Who Cannot Use a Section 690 Direction
Long-standing US residents of Britain often ask for the same treatment after taking on a regional role with heavy travel. Unfortunately, no route exists. Once the four-year window closes, PAYE applies to worldwide employment income regardless of where the work happens, and only treaty relief or the foreign tax credit can address the resulting double tax.
Directors Face an Additional Layer
Statutory directors of UK companies attract particular scrutiny. Notably, HMRC treats board duties as UK duties in most cases, which suppresses the defensible overseas proportion sharply. Our cross-border tax planning specialists routinely rebuild workday calendars before any notification is filed.
National Insurance Ignores the Section 690 Direction
The notification covers income tax only. National Insurance contributions continue on the full amount of earnings, irrespective of how few UK workdays the employee performs. Consequently, the payroll saving is smaller than most executives expect, and the National Insurance rules operate on a wholly separate basis.
Why NIC Makes the American Position Worse
National Insurance is not a creditable income tax for US purposes. Therefore an American cannot offset UK NIC against US federal income tax on Form 1116, and the contribution becomes a pure cost. Furthermore, the employer's secondary contribution raises the total cost of the assignment without generating any US relief whatsoever.
Certificates of Coverage and the Totalisation Agreement
Where a US employer seconds an executive to Britain temporarily, a certificate of coverage under the US-UK totalisation agreement can keep them in the US social security system and out of UK NIC. However, an executive employed directly by the UK entity rarely qualifies. Accordingly, the certificate must be secured before the assignment begins, not afterwards.
What a Section 690 Direction Does to Your US Tax Return
This is the section every UK adviser omits. The notification deliberately reduces the UK tax you pay during the calendar year, and the US foreign tax credit follows the tax actually paid or accrued. Therefore the relief that helps your UK cash flow can simultaneously create a US liability.
Lower UK Withholding Means a Smaller Foreign Tax Credit
On the default cash basis, the foreign tax credit counts UK tax paid within the US calendar year. A section 690 direction shifts UK tax out of that year and into a January balancing payment two years later. Consequently, Form 1116 may show insufficient credit precisely when US tax on the same income falls due.
The Accrual Election Under Section 905
Electing to claim credits on the accrual basis under section 905(a) matches the UK tax to the year the income arose, which repairs much of the mismatch. Nevertheless, the election binds all future years and cannot be revoked casually. In our experience, it suits executives who expect several years of heavy UK balancing payments and suits nobody planning to leave Britain shortly.
Estimated Tax and the Section 6654 Penalty
A UK employer withholds no US federal tax. Therefore the American executive must fund quarterly estimated tax payments personally. When a section 690 direction shrinks the available credit, the required instalments rise, and section 6654 imposes an underpayment penalty with no general exception for residence abroad.
Why the Foreign Earned Income Exclusion Rarely Rescues It
Executives frequently ask whether the foreign earned income exclusion solves the problem. Rarely. The exclusion covers a modest slice of a seven-figure package, it strips out the very UK tax that would otherwise generate credit, and it interacts badly with the credit on the remaining income. Our US tax return preparation team models both routes before filing.
Case Study: A Section 690 Direction on a £1.4m Package
An American managing director joined a London investment bank in September 2025 after twelve years in New York. She qualifies as a new resident, and her 2026-27 package totals £1.4m. Genuine non-UK workdays reach 40%, covering New York, Frankfurt and Hong Kong.
What the Section 690 Direction Delivered
Her employer filed the notification in April 2026. Although her real overseas proportion was 40%, the new cap limited the notification to 30%. Accordingly, payroll excluded £420,000 from PAYE and withheld on £980,000, saving roughly £189,000 of in-year withholding at the 45% additional rate.
What the Return Will Actually Support
Her Overseas Workday Relief claim is capped at the lower of 30% of £1.4m or £300,000. Therefore the return supports £300,000 only. The £120,000 difference attracts UK tax at 45%, producing a balancing payment of £54,000 due on 31 January 2028, alongside a first payment on account of £27,000 the same day.
The US Consequence Nobody Budgeted
That £54,000 of UK tax reaches HMRC in calendar 2028. On the cash basis, it therefore credits against her 2028 Form 1040, two filing seasons after the income arose. Meanwhile her 2026 US return carries full US tax on income that UK payroll under-taxed. We restructured the position using the accrual election and a protective amended return, since section 6511(d)(3) allows ten years to claim a foreign tax credit refund.
How TaxYork Can Help
We prepare US and UK returns for senior executives, investment bankers and company owners whose earnings straddle both systems. Specifically, we review every section 690 direction notification before the employer files it, rebuild the workday calendar from travel records, and model the resulting foreign tax credit position across both tax years.
Coordinating the Notification With the Return
Most failures happen because the payroll estimate and the Self Assessment claim are prepared by different people, months apart. We control both. Consequently, our clients know the January position in April, not in the following winter.
Catching Up Where Reporting Has Slipped
Where an executive has missed US returns, missed FBAR filings, or missed reporting a UK pension or investment account, we handle the remediation alongside the current-year work. Additionally, our FBAR and FATCA reporting service addresses the foreign account disclosures that arrive with a UK relocation. Professional guidance from the ICAEW technical tax faculty, the Chartered Institute of Taxation and the AICPA tax resources informs our approach throughout.
Conclusion
A section 690 direction remains valuable, yet it is no longer the simple cash-flow win it was before April 2025. The annual renewal, the 30% in-year cap, the unapplied £300,000 ceiling and the National Insurance carve-out each shift risk onto the employee. Above all, the American executive faces a fifth problem the UK market ignores entirely, namely the interaction with the US foreign tax credit.
Ultimately, the fix is coordination. Model the Self Assessment outcome before the notification is filed, decide the accrual election deliberately, and fund the US instalments accordingly. Do that, and a section 690 direction improves your cash flow in both countries rather than one.
Contact Us
Speak to a specialist who handles both returns. To review your section 690 direction position before the next payroll cycle, book a consultation with TaxYork. Email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about the section 690 direction regime and is not tax advice. Tax law changes frequently, and the rules described here apply to the 2026-27 UK tax year and the 2026 US tax year. Individual circumstances vary considerably. Accordingly, you should obtain professional advice before acting. TaxYork accepts no liability for action taken in reliance on this article.