A US company with one employee working from a UK home can end up with a taxable presence in the UK, called a permanent establishment (PE). Under the US-UK income tax treaty, that happens when the home works as a fixed place of business for the company, or when the employee habitually exercises authority to conclude contracts that bind it. Permanent establishment risk for remote employees rises with time worked from home, client-facing work in the UK, and deal-closing authority.
If a PE exists, HMRC can tax the profits attributable to it, and UK payroll and filing duties follow. This guide covers the US-UK cross-border tax rules that decide the question in 2026: treaty Article 5, HMRC's International Manual, the OECD's 2017 and 2025 home office commentary, PAYE and National Insurance, the social security agreement, US filings, and a worked scenario at 2026-27 rates.
Article 5 of the US-UK income tax convention, signed on 24 July 2001, defines a PE as "a fixed place of business through which the business of an enterprise is wholly or partly carried on." It includes "especially" a place of management, a branch, an office, a factory and a workshop. A construction or installation project counts only if it lasts more than twelve months.
Two further paragraphs decide most remote employee cases.
Article 5(4), preparatory or auxiliary work. A fixed place used solely for storage, purchasing, collecting information or "any other activity of a preparatory or auxiliary character" is deemed not to be a PE. A UK employee doing market research or back-office support usually fits here. One who sells or delivers the core service usually does not.
Article 5(5), the dependent agent rule. A person who "has and habitually exercises" in the UK "an authority to conclude contracts that are binding on the enterprise" creates a PE, unless their activities stay within Article 5(4). Brokers and agents of independent status are carved out by Article 5(6), and an employee is rarely independent.
Article 7 then limits UK tax to profits "attributable to that permanent establishment," which is a transfer pricing exercise. Our guide to the five OECD transfer pricing methods explains the usual approaches.
The OECD rewrote the agent test in 2017 to reach a person who plays "the principal role leading to the conclusion of contracts." The US kept the pre-2017 wording, and the OECD Model records that "The United States reserves its right to follow the versions of paragraphs 5 and 6 as they stood before the 2017 update."
UK domestic law has moved. HMRC's INTM264300 states: "For chargeable periods beginning on or after 1 January 2026, CTA2010/S1141(1)(b) has been updated to align with the OECD Model Tax Convention." HMRC tells officers to "consider which provision is contained in the relevant treaty where one is in place," so a US company entitled to treaty benefits can rely on the narrower Article 5(5). If you take that position on a US return, see our note on Form 8833 treaty disclosures.
HMRC's view of PE law sits in the International Manual at INTM264000. The pages that matter for remote staff:
| HMRC page | Topic | Point for remote employees |
|---|---|---|
| INTM264300 | Definition | CTA 2010 s1141 mirrors Article 5; agent limb aligned with the OECD from 1 January 2026 |
| INTM264420 | Place of business | Space must be "at the disposal" of the enterprise; shared use still counts |
| INTM264435 | Permanence | Recurring presence can meet the permanence test; rotating staff keep continuity |
| INTM264440 | Personnel | A secondee working for the host usually creates no PE for the sender |
| INTM264510 | Dependent agents | Explains "habitually" and the "principal role" wording |
INTM264435 gives two useful examples. An employee spending a fixed three months in the UK each year has a presence that "is fixed and so not random or sporadic." A team rotating six staff through the UK over nine months meets the permanence test because "the changing identity of the visiting personnel doesn't affect the continuity" of the presence. On agents, INTM264510 says contract conclusion "must take place repeatedly" for a PE to arise, and not "merely in isolated cases."
Until late 2025, paragraphs 18 and 19 of the OECD Commentary on Article 5 governed home offices. Paragraph 18 said a home office "should not lead to the automatic conclusion" that it is at the company's disposal. Risk arose where it "is used on a continuous basis" and the company "has required the individual to use that location," for example "by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office." Under that wording, voluntary home working and an offered coworking desk lowered risk.
The 2025 Update to the OECD Model Tax Convention, adopted by the OECD Council on 18 November 2025, deleted those paragraphs and added a two-step test.
Home working "solely to obtain or retain the services of that individual" or "solely to reduce costs" is no commercial reason. Neither is the mere presence of customers, a different time zone on its own, or "short occasional visits to the premises of a customer."
The OECD's examples show the line:
The Commentary interprets the treaty and leaves the 2001 text unchanged. It is still the clearest standard both tax authorities have, so plan US-UK remote roles against it.
PE and payroll are separate tests with linked answers. Our guide to paying international employees covers payment mechanics.
PAYE. PAYE81610 says "there is a territorial limitation to PAYE which restricts it to cases where the employer has a 'tax presence' here." A branch, agency or UK representative office creates one, but HMRC "would not regard an overseas employer as having a tax presence in the UK simply because there are employees in the UK." A US employer without presence can run PAYE voluntarily. A PE gives the company a branch-like presence, and HMRC can then require PAYE.
Employer National Insurance. Secondary Class 1 liability depends on regulation 145 of the Social Security (Contributions) Regulations 2001. NIM33510 says the employer must be "resident," "present," or "have a place of business in GB," with evidence such as "fixed premises in the UK" or a UK bank account. HMRC's 2026-27 rates for employers set employer NIC at 15% above £5,000 a year, and employee NIC at 8% from £12,570 to £50,270 and 2% above that.
Secondment. When a US company seconds an employee to a UK affiliate, HMRC's globally mobile employees guidance says the UK entity "must operate PAYE" unless the US employer does. INTM264440 adds that secondment "will not normally result in the seconding enterprise having a fixed place of business." The host should direct the work and bear its cost through a recharge.
The USA is on HMRC's list of social security agreement countries. IRS Publication 54 says these agreements eliminate "dual coverage and dual contributions (taxes) for the same work." Coverage usually follows the place of work, but a worker "temporarily sent to work in a foreign country" can "generally remain covered only by U.S. social security." The IRS totalization page puts the usual limit at "five years or less."
For a posted US employee, the employer "should get a certificate of coverage from the SSA's Office of Earnings and International Operations." With it, GOV.UK confirms no UK National Insurance is due. The employer keeps paying FICA: 6.2% Social Security on wages up to the 2026 base of $184,500 and 1.45% Medicare, each side.
A UK national hired locally is in UK National Insurance from day one, and no US certificate applies.
Withholding. Publication 54 says "U.S. employers must generally withhold U.S. income tax from the pay of U.S. citizens working abroad unless the employer is required by foreign law to withhold foreign income tax." A US citizen can file Form 673 to stop withholding on wages covered by the foreign earned income exclusion of $132,900 for 2026. Wages paid to a non-US person for UK work are foreign source and fall outside US withholding. For US state rules, see setting up payroll for remote workers.
Treaty Article 14. A US resident working in the UK escapes UK tax only if present 183 days or less in a twelve-month period, paid by a non-UK employer, and the pay "is not borne by a permanent establishment which the employer has in the other State." A PE can remove that exemption for every US employee who visits.
Corporate filings. With a PE, the company files UK corporation tax returns on the profits attributed to it. The main rate is 25%, and GOV.UK states that a non-UK resident company cannot claim Marginal Relief. In the US, Form 8858 is used by "certain U.S. persons that operate an FB," so see our Form 8858 guide. UK tax can usually be claimed as a foreign tax credit, subject to limits, and employees taxed twice use Form 1116.
This example is illustrative. A Delaware C corporation hires a UK resident account executive on £90,000. She works from her Manchester home every working day, meets UK prospects in person each month, negotiates within a discount band, and sends signed order forms to the US for countersignature. UK revenue is £1,200,000.
Step 1: Fixed place. She works from home over 50% of the time, and local client meetings give a commercial reason (compare Example C). Selling is core work, so Article 5(4) does not help. A fixed place PE is likely.
Step 2: Dependent agent. If the US countersigns without real review, HMRC can argue she exercises authority to conclude binding contracts. Genuine US review weakens that argument under the treaty, though UK domestic law from 2026 would reach her "principal role."
Step 3: Payroll at 2026-27 rates.
| Item | Calculation | Annual amount |
|---|---|---|
| Employer NIC | (£90,000 - £5,000) x 15% | £12,750.00 |
| Employee NIC | (£50,270 - £12,570) x 8% + (£90,000 - £50,270) x 2% | £3,810.60 |
| Income tax (England, standard allowance) | (£50,270 - £12,570) x 20% + (£90,000 - £50,270) x 40% | £23,432.00 |
| Total employer cost | £90,000 + £12,750 | £102,750.00 |
Step 4: PE tax. Assume transfer pricing attributes £120,000 of profit to the PE. At the 25% main rate, with no Marginal Relief for a non-UK resident company, UK corporation tax is £30,000, which may be claimed as a US foreign tax credit subject to limits.
Lower-risk version. At 40% home working, about 88 of 220 working days, with the rest spent at client sites and travelling, she falls below the threshold. Removing negotiation authority and keeping approval in the US cuts the agent risk. Many companies form a UK subsidiary instead, which converts an open question into a known cost; see expanding to the UK.
Does one remote employee in the UK create a permanent establishment for a US company? It can. A home used for at least 50% of working time, with a commercial reason for being in the UK, is likely a fixed place PE under the 2025 OECD commentary. Habitual authority to conclude binding contracts creates a dependent agent PE under Article 5(5).
Is the 50% home office threshold part of the US-UK treaty? The threshold comes from the OECD Commentary adopted on 18 November 2025. The 2001 treaty text is unchanged, and tax authorities use the Commentary to interpret Article 5.
Does a US employer have to run UK PAYE for a remote employee? Only with a UK tax presence, such as a branch or office. Home-based employees do not create one by themselves, though a PE usually does.
How does the totalization agreement treat a seconded US employee? A US employee temporarily sent to the UK can stay in US Social Security, usually for up to five years. The employer requests a certificate of coverage from the SSA and keeps paying FICA.
What changed in UK permanent establishment law in 2026? For chargeable periods from 1 January 2026, the agent rule in CTA 2010 s1141 follows the OECD's "principal role" wording. US companies covered by the treaty can still rely on the older Article 5(5) test.
Madras Accountancy supports US companies with UK employees through bookkeeping, payroll coordination, US tax preparation, and CFO and advisory work, including foreign tax credit and international information return support. To review your US-UK setup, contact our team.
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