US UK Tax Returns Preparation: Shadow Payroll & Appendix 6

A US executive seconded to London under an HMRC Appendix 6 modified PAYE arrangement is taxed on estimates, not actuals. US UK Tax returns preparation for these assignees means rebuilding the real numbers from assignment data — because the shadow payslip, the P60 and the Form W-2 will all disagree, by design.

That disagreement is the single most misunderstood feature of an international assignment, and it is the reason so many senior assignees arrive at Jungle Tax with two, three or four years outstanding on one side of the Atlantic while believing their employer had “handled the tax”. The employer did handle the withholding. Nobody handled the returns. This guide explains exactly how modified PAYE estimates are built and trued up, why the UK and US numbers almost never reconcile on their face, and how the personal returns are actually prepared — including where years are already late.

What is a shadow payroll, and what does Appendix 6 change?

Shadow payroll in plain terms

A shadow payroll is a reporting-only payroll run in the host country. No money leaves it. The executive continues to be paid from the US payroll, in dollars, into a US bank account, on the US pay cycle. Alongside that, a UK payroll is operated purely to capture the UK-taxable element of that same compensation, calculate UK income tax and National Insurance, report it to HMRC in real time, and remit the tax. The employee typically never sees the shadow payslip unless they ask for it.

Shadow payroll exists because the UK taxing right does not follow the paying entity. If duties are performed in the UK, the earnings referable to those duties are within the charge to UK income tax, and PAYE obligations can arise for a non-UK employer with a UK presence or a UK host entity that bears the cost. The money can flow entirely through Delaware; the tax obligation still sits in Newcastle.

What Appendix 6 changes

An ordinary shadow payroll reports actual amounts each period. An EP Appendix 6 modified PAYE arrangement does something quite different, and this is where the reconciliation problem is born. Appendix 6 is a formal agreement between the employer and HMRC, available only for employees who are fully tax equalised. Under it, the employer:

• prepares, before the tax year starts, a best estimate of all the assignee’s UK-taxable earnings for the year — salary, cash allowances, bonus, equity, non-cash benefits and the assignment costs the employer bears;
• grosses that estimate up, because the employer is meeting the tax itself and the tax paid on the employee’s behalf is itself taxable earnings;
• pays one twelfth of the resulting estimated liability to HMRC each month (quarterly where five or fewer employees are covered);
• reviews the estimate in-year, typically between December and April, to pick up bonus, equity vesting and material changes;
• issues a P60 and P11D built on those estimated figures rather than on final actuals;
• settles the true final liability through the employee’s Self Assessment return.

HMRC’s own guidance on the arrangement sits at PAYE82002 in the PAYE Manual, with the Self Assessment consequences at SAM121620. The practical consequence for the individual is stated there plainly: Appendix 6 cases are removed from the normal payments-on-account regime under s59A(9) TMA 1970, because the estimated PAYE is already doing that job.

So the year-end UK forms an Appendix 6 assignee receives are, deliberately, not the answer. They are the deposit. The answer is computed on the return.

Why the payslip is an estimate, not a result

The estimate is built months before the facts exist. At the point it is prepared, nobody knows what the March bonus will be, whether the RSU tranche will vest at $180 or $310, how many US workdays the executive will actually clock, whether the family will take the home-leave allowance, or what the sterling-dollar rate will average. The estimate is a professional guess, grossed up, and paid over in twelfths.

Three things then guarantee it will be wrong:

• Gross-up compounds. Because the employer pays the tax, the tax is pay. That extra pay attracts tax, which is also pay. At UK additional rate the multiplier is material, and a modest error in the underlying estimate becomes a large error after gross-up.
• Equity is unpredictable and it is sourced by workday. RSUs and options vesting during a UK assignment are apportioned across the vesting period by workday location. A single vest can straddle two or three assignment phases and two tax regimes.
• The workday split is only known in arrears. Business travel back to New York, to Frankfurt, to Singapore — each day changes the UK-taxable proportion and, on the US side, the foreign-source proportion.

How modified PAYE estimates are trued up

The true-up runs on a fixed calendar. Understanding it is what allows a return preparer to know which figure is final and which is still provisional at the moment of filing.

Stage	What happens	Timing
Opening estimate	Best estimate of grossed-up UK-taxable earnings for the coming year agreed with HMRC	Before 6 April
Monthly remittance	One twelfth of the estimated liability paid over (quarterly if five or fewer employees)	19th / 22nd monthly
In-year review	Estimate revised for bonus, equity, assignment changes	December to April
P60 issued	Shows estimated pay and estimated tax, not actuals	By 31 May
P11D / P11D(b)	Benefits reported under the modified arrangement	By 31 January following
Self Assessment return	Actual UK liability computed; residual tax paid or repayment claimed	By 31 January following
Modified NIC (EP Appendix 7A)	NIC Settlement Return reconciles estimated to actual Class 1	By 31 March following

Two points matter enormously for return preparation. First, HMRC does not expect the employer to fix the PAYE record after the year by filing corrections to the year-to-date figures; the correction mechanism is the Self Assessment return. Second, National Insurance is not inside Appendix 6. Where the employer is also operating a modified NIC arrangement it does so under a separate EP Appendix 7A agreement, with its own settlement return and its own deadline. An assignee who assumes the P60 tells the whole story has misread the architecture.

Why the UK and US figures rarely agree

This is the heart of it. Six independent forces pull the two sets of numbers apart, and they compound.

1. The tax years do not overlap

The UK year runs 6 April to 5 April. The US year is the calendar year. Every UK tax year straddles two US years and vice versa. A bonus paid in February sits in one UK year and a different US year from a bonus paid in May. Before any substantive difference is considered, the periods themselves are misaligned by roughly a quarter.

2. The definitions of taxable pay differ

The UK charges the grossed-up tax the employer pays on the employee’s behalf as earnings. The US treats employer-paid foreign tax as compensation too, but recognises it on a different timing basis and reports it in different W-2 boxes. Housing, school fees, home leave, cost-of-living allowances, relocation and tax preparation fees are all treated as employment income — but the UK reliefs (limited detached duty and temporary workplace relief) and the US reliefs (the foreign housing exclusion or deduction) are not the same reliefs, are not the same size, and do not attach to the same items.

3. Hypothetical tax is not tax

Under tax equalisation, the employer deducts a hypothetical US tax from the executive’s pay — the tax they would have borne had they stayed at home — and in exchange bears the real US and UK tax on assignment compensation. Hypothetical tax is a contractual deduction, not a tax payment. It is not creditable anywhere. It reduces the compensation the assignee actually receives but it does not appear as tax on either return. Assignees routinely tell us they “paid tax of X” when X is a hypothetical deduction that no revenue authority ever received.

4. Gross-up and tax-on-tax

The UK figure is grossed up. The US figure may be reported gross or net of hypothetical tax depending on the employer’s convention. Comparing a grossed-up UK number with a hypo-reduced US number and expecting agreement is comparing two deliberately different constructions.

5. Currency

UK amounts are computed in sterling using rates at each relevant date; US amounts are computed in dollars. Translating a UK liability into dollars for foreign tax credit purposes uses its own convention. Two correct calculations can differ by several per cent purely on translation.

6. Overseas Workday Relief and the post-2025 UK regime

From 6 April 2025 the UK replaced the remittance basis for new arrivals with the four-year foreign income and gains (FIG) regime, and reformed Overseas Workday Relief alongside it. For a qualifying new arrival, OWR is now available for up to four tax years, is no longer dependent on keeping the money offshore, but is subject to an annual cap of the lower of 30% of qualifying foreign employment income or £300,000. Transitional protection applies to assignees who were already claiming OWR before 6 April 2025.

For a US executive who arrived in London in, say, 2024 or 2025, this is decisive: it changes how much of the assignment compensation is UK-taxable at all, which changes the UK liability, which changes the foreign tax credit available on the US return, which changes the equalisation settlement. Shadow payroll systems are often configured with an OWR percentage that was reasonable at the start of the year and materially wrong by the end of it. Our cross-border tax planning reviews start here more often than anywhere else.

Side by side

Feature	UK / HMRC	US / IRS
Tax year	6 April – 5 April	1 January – 31 December
Year-end employment form	P60 and P11D (estimated under Appendix 6)	Form W-2 (actual, but on US conventions)
Personal return	SA100 with SA102 employment and SA106 foreign pages	Form 1040 with Form 2555 and/or Form 1116
Filing deadline	31 January after the tax year (online)	15 April, automatic to 15 June abroad, 15 October on extension
Payments on account	Disapplied for Appendix 6 assignees	Estimated tax rules still apply
Basis of the withheld figure	Employer’s grossed-up estimate	Actual payroll, less hypothetical tax
Relief for the other country’s tax	Foreign tax credit relief on SA106	Form 1116 credit or Form 2555 exclusion
Social security	Class 1 NIC, possibly under EP Appendix 7A	FICA, subject to the US–UK totalisation agreement

Preparing the US return for an Appendix 6 assignee

The Form 1040 cannot be prepared from the W-2 alone. The W-2 shows what the US payroll paid and withheld; it does not show what the UK charged, what the employer settled on the assignee’s behalf, or how the equalisation settlement resolved.

The core decisions are these:

• Exclusion or credit. The Form 2555 foreign earned income exclusion is capped — $132,900 for 2026 — and for a senior executive on a London package it is usually immaterial, and can be actively harmful because it strips out the low-taxed slice of income while denying credit for the UK tax attributable to it. For most HNW assignees the answer is the Form 1116 foreign tax credit, computed on general category income, with careful attention to the sourcing of equity income by workday.
• Accrual versus cash for foreign taxes. Electing to claim credits on the accrual basis lets UK tax be matched to the US year in which the income arose, rather than the year the employer happened to remit it. Under an Appendix 6 arrangement, where UK tax is paid in estimated twelfths and settled in a later January, this election is very often the difference between a clean credit and a wasted one. The election is effectively irrevocable in its application to later years, so it is made deliberately, not by default.
• Foreign tax redeterminations. When the UK Self Assessment return finalises the real liability — or when the equalisation settlement produces a refund of UK tax to the employer — the foreign tax previously claimed changes. That is a redetermination under section 905(c), reported on Schedule C to Form 1116 and, where US liability moves, by amended return. This is the step that generalist preparers miss, and it is the most common reason an assignee’s file looks fine for three years and then unravels.
• State residency. California, New York, New Jersey and Virginia do not stop taxing an executive simply because they moved to Mayfair. Domicile-based state residency survives an overseas assignment unless it is properly broken, and states do not give credit for UK tax the way the federal system does.

Preparing the UK return for an Appendix 6 assignee

On the UK side, the return is where the estimate meets reality. Preparation means:

• rebuilding actual UK-taxable earnings for the year from assignment records, not from the P60;
• applying the correct workday apportionment and, where available, OWR within the post-2025 cap;
• reporting the benefits and employer-borne costs correctly, including the grossed-up tax itself;
• claiming foreign tax credit relief for US tax properly attributable to the same income;
• using the white space to explain that the figures are prepared under an Appendix 6 modified PAYE arrangement, because HMRC’s specialist team expects to see that;
• settling the residual liability, or claiming the repayment, by 31 January.

Where an assignee is also within the FIG regime, or has US-source investment income, UK trust interests or a US retirement plan, the return is materially more involved and the interaction with the treaty needs to be positioned rather than assumed. Our UK tax services team prepares these alongside the US filing so the two sets of numbers are reconciled once, not twice.

Social security: NIC, FICA and the totalisation agreement

The US–UK social security agreement generally allows an employee sent on temporary assignment to remain in their home system, evidenced by a certificate of coverage. Where a valid certificate is in place, the executive stays on FICA and UK NIC is not due. Where it lapses, or where the assignment extends beyond the permitted period, Class 1 NIC becomes payable — and if the employer is operating EP Appendix 7A, on estimated earnings, reconciled through a NIC Settlement Return by the following 31 March.

Two failure modes recur. The certificate is obtained for a three-year assignment that quietly becomes a five-year assignment and nobody re-applies. Or the assignee has US self-employment income on the side — a board seat, consultancy, an advisory shareholding — and the coverage position for that income is different from the coverage position for the employment.

What if returns are already outstanding?

This is the situation we are most often engaged on. An executive completes a three-year London assignment, returns to New York, and discovers that the employer-provided tax service covered years one and two, that year three was “in progress” when the provider was disengaged, and that nobody filed FBARs at all because the UK bank accounts were opened by the relocation company.

The US catch-up route

Where the failure to file was non-wilful, the IRS Streamlined Filing Compliance Procedures remain the principal route. For a taxpayer who meets the non-residency requirement, the Streamlined Foreign Offshore Procedures require the three most recent delinquent returns, six years of FBARs, and a signed non-wilfulness certification, with the miscellaneous offshore penalty waived. For an assignee who was physically in London for the relevant years, that non-residency test is usually satisfiable on the facts — but it must be tested, not assumed, and the certification narrative has to be accurate about what the employer’s tax provider did and did not do. Our IRS streamlined filing team handles the certification and the accompanying computations as a single exercise.

Assignees whose income was fully reported but whose FBARs were simply missed sit in a different, lighter lane. Assignees whose facts are not comfortably non-wilful sit in a heavier one. Choosing the lane is the first decision, and it is made before a single return is drafted.

The UK catch-up route

Late UK returns are brought up to date through Self Assessment, with penalties determined by behaviour and by whether the disclosure is prompted or unprompted. Where an Appendix 6 arrangement was operating throughout, the employer has generally been remitting estimated tax the whole time, so the outstanding UK exposure is frequently far smaller than the assignee fears — and in a meaningful minority of cases the position is a repayment, because the estimate was set high. That is worth establishing early: it changes the tone of the whole exercise.

A worked sequence: four outstanding years

Where several years are open on both sides, the order of operations is not arbitrary. Preparing them in the wrong sequence produces credits that cannot be claimed.

• Step 1 — Rebuild the compensation record. Assignment letter, equalisation policy, hypothetical tax calculations, all payslips both sides, W-2s, P60s, P11Ds, equity vesting reports with grant and vest dates, and the assignment cost reports the employer’s mobility team holds. The mobility team’s data, not the payroll output, is usually the truthful source.
• Step 2 — Build the workday calendar. Day by day, by country, for every year. Calendar entries, travel bookings and border records. Everything downstream depends on this.
• Step 3 — Compute the UK position first. UK-taxable earnings, OWR where available, and the actual UK liability per tax year. Only now is there a real foreign tax figure to credit.
• Step 4 — Convert UK tax years to US calendar years. Apportion the UK liability to US years on a defensible basis, and decide the accrual election.
• Step 5 — Prepare the US returns. Form 1040 with Form 1116, plus FBAR and Form 8938 where the thresholds are met, plus any Forms 8621 or 3520 the assignee triggered by buying UK funds or being named in a family trust.
• Step 6 — File UK returns and settle. Then feed the final UK figures back through step 5 and report any redetermination.
• Step 7 — Reconcile to the equalisation settlement. Confirm that what the employer says it owes the assignee, or the assignee owes the employer, matches the tax that was actually due. Settlement statements are frequently wrong, and they are frequently wrong in the employer’s favour.

Frequently missed items on assignee files

• UK employer pension contributions treated as tax-free in the UK but as taxable compensation in the US absent a treaty position.
• ISAs and UK-domiciled funds opened on arrival, which are almost always passive foreign investment companies for US purposes.
• The UK bank account opened by the relocation firm, never disclosed on an FBAR because the assignee forgot it existed.
• Equity vesting after repatriation that still carries UK-source workdays.
• A residual state filing obligation nobody addressed on departure.
• Employer-paid tax preparation fees, which are themselves taxable earnings on both sides.

Each of these is individually manageable. Together, across four unfiled years, they are the difference between a routine catch-up and a disclosure. Our US–UK tax accountants prepare both returns from one reconciled dataset precisely so that these do not surface one at a time.

Speak to us in confidence

If you are on assignment in London under a modified PAYE arrangement, or you have come off one and the returns were never completed, the position is almost always more recoverable than it looks — but it gets harder the longer the compensation data sits with a former employer. We prepare US and UK returns for senior assignees as a single, reconciled exercise, including years that are already late. To discuss your position privately and without obligation, contact our cross-border team for a confidential consultation.