Missed UK Tax Returns: DPNI Scheme on a US Payroll 2026

If you live in London, work for a US employer with no UK presence and receive a Form W-2 rather than a payslip, UK tax is still due on those earnings and HMRC expects you, not your employer, to collect it. That is what a DPNI direct payment scheme does, and its absence is the most common cause of Missed UK tax returns among American executives here.

Why an American on a US payroll ends up with years of unfiled UK returns

The pattern is unusually consistent. A US bank, fund, technology group or family office moves a senior person to London. There is no UK subsidiary, or the UK entity exists but does not employ this individual. Human resources keeps the employee on the domestic payroll because that is where the benefits, equity administration and payroll system already sit. Federal income tax and Social Security and Medicare continue to be withheld. The employee arrives, becomes UK resident, and receives a net dollar salary into a US account with nothing deducted for the United Kingdom.

Nobody sends a letter saying this is wrong. The employer sees no UK filing obligation and is, on the income tax side, usually correct. The employee sees withholding on the payslip and assumes the tax has been dealt with. Two, three or four UK tax years pass. The problem surfaces when a mortgage application asks for a tax year overview, when HMRC issues a notice to file after receiving Common Reporting Standard data from a UK bank, or when the individual finally engages a UK adviser and discovers there has never been a UK record of the employment at all.

At Jungle Tax this is one of the cleanest and most fixable categories of cross-border non-compliance we prepare, because the income is fully documented on the US side. The difficulty is not finding the numbers. It is that the UK collection mechanism was never switched on, the returns were never filed, and the two tax systems do not agree on what year anything happened in.

When does a foreign employer have no obligation to operate PAYE?

Two separate questions have to be answered, and they have different answers. Income tax and National Insurance are governed by different tests, and conflating them is where most preparation errors begin.

Income tax: the tax presence test

PAYE obligations attach to an employer with a tax presence in the United Kingdom. An entity incorporated and operating entirely in the United States, with no branch, no fixed place of business, no UK premises and no UK payroll function, is outside the charge. HMRC cannot require it to operate PAYE and, in practice, will not open a mandatory scheme against it. The employer may volunteer to register, and some do as a matter of policy, but it cannot be compelled.

The tax remains due. Employment income from duties performed in the United Kingdom by a UK resident is taxable here. What disappears is the employer's collection role, not the liability. HMRC's answer is to move collection to the only party inside its jurisdiction: the employee.

National Insurance: place of business, residence and the host employer rule

Secondary Class 1 contributions depend on whether the employer is resident or present in Great Britain or Northern Ireland, or has a place of business here. HMRC applies this practically, looking for evidence such as leased premises, a registered office, letterhead, a listed address or a UK bank account used for the business. A genuinely absent US employer fails the test, so no secondary liability arises.

Primary contributions are different. They are the employee's own liability and survive the employer's absence, provided the employee is not covered by the other country's system under the social security agreement. There is also a host employer rule: where a foreign employer sends someone to work for a UK business, that UK business can be treated as the employer for contribution purposes. If you are genuinely embedded in a London affiliate, that point has to be tested before concluding there is no secondary liability, because the answer changes which scheme type is correct.

DPNI, DCNI and a PAYE Direct Payment scheme: what is the difference?

These are HMRC employer record scheme types, described in the department's own operational guidance. They are not competing elections and you do not get to choose freely; the facts dictate which one belongs on the record.

• DPNI - direct payment of both income tax and National Insurance. The employee holds a PAYE reference in their own name and accounts for income tax and primary Class 1 contributions on their own earnings. This is the default where a UK resident works here for a foreign employer with no UK place of business and no certificate of coverage applies.
• DCNI - direct collection of National Insurance only. Used where contributions are due but the income tax is being accounted for by another route, for example under a modified arrangement or where the employer has agreed to bear the income tax elsewhere and the tax is settled through Self Assessment.
• PAYE Direct Payment procedures - the broader umbrella term HMRC uses for these arrangements, covering a range of cases from embassy staff and international organisation employees to mariners under offshore manning arrangements. The underlying principle is identical: the liability is collected from the individual because there is no collectable employer.

HMRC's Real Time Information guidance treats these schemes as ordinary employer records once opened. You will have a PAYE reference, an Accounts Office reference, filing deadlines and payment dates, exactly as a small business would. The department's scheme type descriptions are set out at PAYE20100 for direct payment of tax and contributions and PAYE20090 for the contributions-only variant.

Point of comparison	United Kingdom position	United States position
Who collects the tax on the salary	The employee, through a direct payment scheme in their own name	The employer, through federal payroll withholding reported on Form W-2
Tax year	6 April to 5 April	1 January to 31 December
Reporting cadence	Full Payment Submission on or before each payment date, plus an annual return	Annual Form 1040; payroll reporting handled by the employer
Social security	Primary Class 1 contributions, unless a certificate of coverage applies	Social Security and Medicare withheld, unless coverage is certified to the UK
Secondary or employer contributions	None where the employer has no UK place of business and no host employer applies	Employer share of FICA continues on the US payroll
Relief for the other country's tax	Foreign tax credit relief in the Self Assessment return, where the US has primary taxing rights	Foreign tax credit on Form 1116 for UK income tax only
Consequence of doing nothing	Unfiled returns, unpaid PAYE, penalties and daily interest	Return is filed and paid, but overstates US tax because no credit is claimed

How the employee registers and what must actually be filed

Opening the scheme

The self-service employer registration route on GOV.UK does not produce these scheme types. Registration is handled by contacting HMRC's employer helpline and explaining the position: UK resident, duties performed in the United Kingdom, employer outside the UK with no place of business here, no UK PAYE scheme, and therefore a direct payment scheme required in your own name. HMRC opens the employer record and issues the references. Where back years are involved, the start date requested matters, and it should be the date the UK employment actually began, not the date of the call.

Running the payroll under Real Time Information

Once the scheme exists, the obligations are the ordinary employer obligations, discharged by the employee wearing an employer's hat:

• A Full Payment Submission for each payment of earnings, filed on or before the date the salary is paid, reporting gross pay, income tax deducted and primary Class 1 contributions.
• Conversion of the dollar salary to sterling on a consistent and defensible basis for each pay period, retained in the working papers.
• Payment of the tax and contributions to HMRC by the statutory monthly dates, with quarterly payment available where average monthly liabilities fall below the published threshold.
• Year-end reporting and a P60 covering the earnings run through the scheme.
• Employer Payment Summary filings where a period has no payment to report.

Commercial payroll software will generally accommodate this once the scheme type is correctly reflected. The practical difficulty is not the software. It is that gross US pay includes items the UK treats differently, including equity vesting, employer-provided benefits, relocation allowances and bonus timing, and each needs to be characterised before it is run through the submission.

Self Assessment sits on top, it does not replace the scheme

Operating a direct payment scheme does not discharge the return obligation. You remain within Self Assessment, and the return must report the employment income, the tax deducted under your own scheme, your residence and, where relevant, domicile position, any US source income that remains taxable here, and claims for relief. We regularly see cases where the scheme was opened and run competently for three years while no return was ever filed. The result is still missed UK tax returns, with the full penalty ladder attached, even though the tax itself was paid on time.

The catch-up problem: several years with no scheme and no return

This is the situation that brings most people to us. The employment began in, say, 2021. There is no scheme, no return, no UK record of the income, and four completed UK tax years behind you. The work divides into quantification, disclosure and settlement.

Quantifying the arrears

The arrears have to be built year by year against the 6 April to 5 April cycle, which the US payroll records do not follow. The reconstruction typically runs:

• Obtain every Form W-2 and the underlying pay statements for the whole period, because the W-2 is annual and the UK needs periodic data.
• Reallocate earnings into UK tax years by pay date, splitting the December and January pay runs across the boundary correctly.
• Identify workdays outside the United Kingdom for each year, which affects how much of the salary is within the UK charge in the years before and after arrival.
• Characterise non-cash items, particularly equity that vested while UK resident, and bring them in at the right point.
• Convert to sterling on a consistent basis and compute income tax and primary Class 1 contributions at the rates in force for each year.
• Determine whether a certificate of coverage was in force for any part of the period, because contributions fall away for any certified detachment period.

Penalties and interest on back years

Two penalty regimes run in parallel and people frequently budget for only one. On the filing side, HMRC's published position is an automatic fixed penalty of £100, daily penalties of £10 once a return is three months late up to a maximum of £900, and further penalties of the greater of £300 or five per cent of the tax due at six months and again at twelve months. On the payment side, penalties of five per cent of the tax unpaid arise at thirty days, six months and twelve months. The department sets both out at its Self Assessment penalties guidance. Interest runs daily from the original due date, at a rate linked to the Bank of England base rate.

Multiply that across four unfiled years and the fixed and daily elements alone are substantial before a penny of tax is considered. Where the income has an offshore element, and a US employment paid from the United States does, the tax-geared element can be uplifted above the domestic rates. Behaviour matters: an unprompted disclosure made before HMRC makes contact is treated materially more favourably than one made after a notice lands.

How HMRC expects the arrears to be presented and paid

There is no single button for this. In practice the case is worked one of two ways. Either HMRC opens the direct payment scheme from the historic start date and the back-year liabilities are reported and settled through it, or the scheme is opened prospectively and the historic years are brought in through the returns themselves, with the tax paid as Self Assessment liabilities. Which route HMRC directs depends on how many years are involved, whether contributions are in point and whether a formal disclosure route is being used for the offshore element.

What does not vary is the expectation of a coherent schedule. HMRC wants to see each UK tax year, the earnings allocated to it, the sterling conversion basis, the tax and contributions computed, the payments made and the resulting balance. A disclosure that presents four years as a single aggregate number invites enquiry. One that shows the arithmetic year by year, with the workday analysis behind it, usually does not.

The US overlay: the same wages are already on a Form W-2

Fixing the UK side creates a US problem that is genuinely difficult and is where generalist preparation on either side of the Atlantic tends to fail. The same dollars have now been taxed twice: once through federal withholding reported on the W-2, and once through a back-dated UK scheme. Relief exists, but only if the credit is claimed in the right year and measured correctly.

Matching UK tax to the right US year

The 6 April to 5 April year cannot be mapped onto a calendar year without an allocation. UK tax computed for 2022/23 relates to earnings straddling two US years. The credit claimed on Form 1116 must be attributed to the US year in which the underlying income was recognised, which means apportioning the UK liability across the boundary on a reasonable, documented and consistently applied basis. Doing it by reference to the earnings actually paid in each calendar segment is the approach that survives review; doing it by dividing the UK year in half is not.

Paid versus accrued

This is the decisive mechanical choice in a catch-up. A cash-basis taxpayer credits foreign tax in the year it is paid. If four years of UK liability are settled in a single payment in 2026, the entire credit lands in 2026, against a single year's foreign source income and a single year's limitation. The credit is very likely to exceed what that year can absorb, leaving excess credits that carry back one year and forward ten, and doing nothing at all for the US tax already paid in the earlier years.

Electing the accrued basis instead attributes the UK tax to the years in which the liability arose. That aligns the credit with the income, but it means the earlier US returns have to be amended to claim it, and the election is binding for all subsequent years once made. Where the UK liability is later adjusted, the foreign tax redetermination rules require the position to be reported rather than silently absorbed. The IRS guidance on the credit sets out the framework; the year-matching judgement is the part that has to be worked case by case.

National Insurance is not a creditable tax

Primary Class 1 contributions paid under a system covered by the US-UK social security agreement are not creditable foreign income taxes. Only the income tax element of a direct payment scheme belongs on Form 1116. We see the full scheme liability claimed as a credit with some regularity, and it is an error that survives for years because nothing on the US return flags it.

Why Form 673 and the earned income exclusion interact badly here

Form 673 lets an employee tell a US employer to stop federal withholding in anticipation of the foreign earned income exclusion and housing exclusion. In this fact pattern it frequently makes matters worse. If the salary is fully taxed in the United Kingdom, the filing position almost always rests on the foreign tax credit rather than the exclusion, because excluding income also disallows the credits attributable to it. A Form 673 on file then stops withholding that the return will not support, producing a balance due and potential estimated tax charges. Worse, once the exclusion has been used and later revoked, the revocation carries consequences for future years. Where a back-dated UK scheme is being put in place, the interaction between the withholding instruction and the eventual credit claim has to be worked through before the form is lodged, not after. We cover the form itself in detail in our guide to Form 673 and stopping federal withholding on a US payroll in London.

State withholding deserves a separate look. If the W-2 still reports withholding for a state the individual has left, that state may not recognise foreign tax credits or treaty relief at all, and the position has to be resolved through the state residency rules rather than through the federal return.

Does the totalization certificate make it DCNI or full UK contributions?

The social security agreement between the two countries, in force since 1985, prevents contributions being due to both systems for the same work. A US employer detaching an employee to the United Kingdom for a limited period can obtain a certificate of coverage confirming that the employee stays in the US system; UK contributions are then not due for the certified period.

That certificate is what determines the shape of the scheme. With a valid certificate covering the whole period, income tax is due but contributions are not, which points away from a scheme collecting both. Without one, or for any period after it expires, primary Class 1 contributions are due and must be collected. In catch-up cases the certificate is frequently missing entirely, because nobody applied for one when the move was arranged, and Social Security and Medicare have simply continued to be withheld on the US side by default. Establishing which periods are certified, and which are not, is the first question we answer in any of these engagements, because everything downstream depends on it.

How this differs from three situations it gets confused with

• Short-term business visitors. An Appendix 4 arrangement relaxes UK PAYE for employees of overseas companies who visit briefly and remain treaty-protected. It is an employer-side relaxation for visitors, not a collection mechanism for a resident employee, and it is administered by a UK entity. Our guide to short-term business visitors and Appendix 4 sets out where the line falls.
• Shadow payroll under Appendix 6. A modified arrangement operated by a UK employer for a tax-equalised assignee is the opposite fact pattern: there is a UK employer, and it is running the payroll. See our guide to shadow payroll and Appendix 6 assignees.
• Off-payroll working. If the engagement runs through a personal service company rather than an employment contract, the analysis is an off-payroll status question, not a direct payment question. Our guide to IR35 status determinations for US-UK personal service companies covers that route.

A worked sequence for a four-year catch-up

1. Establish UK residence for each year and identify the exact date UK duties began.
2. Check whether a certificate of coverage exists for any part of the period, and obtain confirmation either way.
3. Collect the full US payroll record: W-2s, pay statements, equity vesting schedules and benefit summaries.
4. Reallocate earnings into UK tax years and perform the workday analysis for each.
5. Compute UK income tax and, where due, primary Class 1 contributions, year by year in sterling.
6. Approach HMRC to open the correct scheme type from the correct historic start date, and agree how the back years will be reported.
7. Prepare and file the outstanding Self Assessment returns, claiming relief where the United States has primary taxing rights.
8. Settle the tax, contributions, penalties and interest, with a schedule showing the arithmetic.
9. Turn to the US side: determine the paid or accrued position, apportion the UK tax across calendar years, and amend the affected US returns or claim the credit in the year of payment.
10. Put the prospective scheme onto a proper monthly cycle so the problem does not recur.

The errors we correct most often

• Assuming that because the US employer had no UK obligation, no UK tax was due.
• Opening the scheme prospectively and quietly leaving the back years unreported, which converts an unprompted disclosure into a much worse position if HMRC asks.
• Running the scheme faultlessly while never filing the return.
• Claiming the whole scheme liability, including contributions, as a US foreign tax credit.
• Crediting four years of UK tax in a single US year on the cash basis without considering whether the accrued election would align it properly.
• Leaving a Form 673 on file with the US employer while the UK return position relies on the credit rather than the exclusion.
• Using a crude half-and-half split to map UK tax years onto US calendar years.

Getting the position straight

A direct payment scheme is not exotic. It is an ordinary PAYE scheme with the employee standing in the employer's place, and once it is running it takes very little time each month. What makes these cases demanding is the back years: reconstructing several UK tax years from US payroll data, settling the arrears in a form HMRC accepts, and then making sure the United States gives credit for the tax in the year that actually matters. Both halves have to be prepared together, by people who can see both returns at once. Our UK tax services and US tax services teams work these cases jointly, and you can read more of our work for high net worth cross-border clients or browse the full guide library.

If you are on a US payroll in London and have returns outstanding, the position is entirely recoverable, and it is materially better handled before HMRC writes to you than after. To review your years, quantify the arrears and align the US credit position, contact our cross-border team for a confidential consultation with our US-UK specialists.