Moving an employee from a DPNI to a full UK payroll

A direct payment scheme exists because there is no UK employer to run payroll. Set up a UK company, open a branch, or place your employee with a UK business, and that stops being true. The scheme has to close and a proper PAYE scheme has to take over. Here is what actually has to happen, in what order, and the mid-year details that catch people out.

First, which change has actually happened?

Two quite different things get described as "setting up in the UK", and they lead to different work. Before anything else, settle which one you are doing, because it decides whether your employee stays in the same job on paper.

HMRC's own instructions set out when a direct payment arrangement is used at all, and the conditions have to hold together: there is employment income that is assessable, there is likely to be a tax liability, there is no employer to operate PAYE or it is considered impractical for the employer to operate PAYE, and the taxpayer is willing and able to operate PAYE correctly on their own income. HMRC staff are told to consider first whether PAYE can simply be operated normally instead. A UK entity that can run payroll is what removes the third condition, and with it the basis for the scheme.

HMRC's test for a tax presence is not a high bar. Its own manual says that for there to be a presence "we need to show there is something in the UK similar to a branch or agency, office or establishment", and essentially a UK address where HMRC can contact the employer. For National Insurance the question is whether the company is resident, present, or has a place of business here, judged on facts like premises, a lease, UK registration and how the business presents itself.

The trigger most people miss

You do not have to move the employment contract, or even open a branch, for the answer to change. If your UK employee works for a UK business that is not their employer, for example a UK client they are placed with or a group company they now work for, the law can treat that UK business as the employer for PAYE and National Insurance.

HMRC's employer guide puts it plainly: where an employer outside the UK with no place of business here makes employees available to work in a UK business, the law treats the UK business as their employer, which most commonly arises with workers supplied by a foreign agency or loaned from a linked foreign company. That UK business then carries both the employee's and the employer's National Insurance, and has to register as an employer.

So the new subsidiary can become responsible from the moment your employee starts working in its business, whatever the paperwork says and whoever pays the salary. That is the date the scheme should change, not the date somebody gets round to signing a transfer.

The sequence that works

Run these in order. Doing them the other way round is what produces duplicate employment records and a tax code that makes no sense to the employee.

1. Register the new PAYE scheme first. You must register before the first payday, and you cannot register more than two months ahead of it. HMRC does not publish how long registration takes, so build in more time than you think you need. If the reference has not arrived by payday, GOV.UK is clear on what to do: run the payroll, store the Full Payment Submission, and send it late once the reference comes through.
2. Agree the change date and stick to it. One date for the last pay run on the direct payment scheme and the first on the new one. A week of overlap is where duplicate records come from.
3. Report the final pay under the old scheme. The scheme is closed by sending a final submission that carries the cessation date and a leaving date for the employee. Any tax and National Insurance still owed is due within 17 days of the end of the final tax month, or 14 if you are paying by cheque.
4. Start the new employment cleanly. Where the employee moves to a new UK company, the new employer's first submission carries full starting details and year to date figures that begin at zero, with the employee's own pay and tax history used to work out the right tax code.
5. Do not reuse the old payroll identifier. HMRC's guidance is blunt that reusing one creates a duplicate record. The "payroll ID changed" marker is for a change within the same PAYE reference, which is not what is happening here, so setting it across two references is one of the reliable ways to end up with two employments on HMRC's system for one person.

The mid-year details that go wrong

Student loan repayments restart

A new employer works out student loan repayments from its own pay periods, and ignores what was earned elsewhere. Move mid-year and the employee effectively gets the threshold twice, once in each employment, so less comes off than they expect this year. It is not an error, but it is worth telling them before they notice it themselves. Deductions in the new job start from one of three things only: a P45 marked to say they continue, a start notice from HMRC, or what the employee tells you, normally on a starter checklist. Note that the P45 marker says a loan is being repaid but does not say which plan, and it never carries the amounts deducted, so the plan type has to come from the employee. If too much comes off across the year, the Student Loans Company repays it, not the employer.

The tax code, and the risk of an emergency one

If the new employer does not have the employee's pay and tax details, the employee gets an emergency code, and HMRC can take up to 35 days from the start of the job to put the right one in place. On a modest salary that is an irritation. On a salary with a bonus in the first month it is a large and avoidable overpayment. Get the figures from the closing scheme before the first pay run, not after it.

National Insurance starts again in the new employment

National Insurance is worked out per employment and per pay period, so the new employer starts from scratch rather than picking up where the old scheme left off. Two points are worth flagging to a well paid employee. The regulations set an annual maximum for someone employed in more than one employment in a tax year, and HMRC's wording is not limited to jobs held at the same time, so a mid-year move is within its scope. In practice it almost never bites on a clean one-job-after-another change, because the cap is built on a full year of the band between the thresholds. Worth knowing it exists, not worth worrying about. And if the employee becomes a director of the new company, directors have an annual earnings period, pro rata from appointment, which changes the calculation entirely. That is the single most missed item in this whole move.

Employment Allowance is not automatic

The new company can reduce its employer National Insurance bill by up to £10,500 a year, but only if it qualifies. A company whose sole director is its only employee paid above the secondary threshold cannot claim, which is exactly the shape of a small UK subsidiary with one transferred employee who has been made a director. Connected companies get one allowance between them, not one each. Claiming is quick, and earlier is better, because the allowance runs from when you claim.

There is a timing quirk worth knowing if the subsidiary is new. HMRC's guidance says a company acquired or created after 6 April is not treated as having connected companies for the rest of that tax year, so it can claim even where the group already does. From the following 6 April the connected companies rule applies as normal. So the allowance may be available in year one and gone in year two, which is not a mistake in your payroll, and it is better understood in advance than queried later.

The pension is a new duty, and possibly an old one

A new employer's automatic enrolment duties start the day it employs its first member of staff. Staff must be written to within six weeks, and a declaration of compliance filed within five months. Enrolment can be postponed for up to three months, but the duties start date and the declaration deadline do not move with it.

There is a harder question underneath. Being based abroad never removed the duty in the first place: what matters is whether the worker ordinarily works in the UK, and a UK employee whose tax and National Insurance are paid here is squarely in that territory. So the new subsidiary may not be starting with a clean slate. It is better to look at that deliberately than to discover it later. Our guide to auto-enrolment for overseas employers covers the duties themselves.

Continuity of employment is a legal question, not a payroll one

Whether the employee's service with the overseas company counts towards their UK employment rights with the new company is an employment law question, and the answer turns on the specific companies and the way the move is done. It is not something a payroll provider should tell you in passing, and it is not something HMRC rules on, beyond its own rules for statutory payments. Take advice on it before the move rather than after.

What about the employee's tax return?

It does not switch itself off. If HMRC has issued a notice to file, that notice stands until HMRC withdraws it, so the employee should tell HMRC as soon as they think a return is no longer needed, and well before the 31 January deadline. HMRC decides, not the taxpayer. Worth knowing: HMRC's own list of who must send a return does not include running a direct payment scheme, so whether a return is still needed depends on the employee's wider circumstances rather than on the scheme itself. Our guide to Self Assessment on a direct scheme goes through it.

Where HMRC is silent, and why that matters

This is the honest part, and you will not find it on many pages about this subject.

• There is no HMRC guidance at all on ending a direct payment scheme because the employer has gained a UK presence. The only public page about employee operated schemes was last updated in 2014 and does not mention closing one.
• HMRC's internal instructions for closing these schemes are built around a form abolished in 2013, and the detailed action guide for direct payment schemes is withheld from publication.
• Whether a P45 is produced when a direct payment scheme closes is not addressed anywhere. In practice the employee holds their own year to date figures from their own submissions and can give them to the new employer, which is what matters.
• Whether these schemes collect student loan repayments at all is not stated either way.

None of that makes the move risky. It does mean that anyone who tells you there is a standard HMRC process for it, with a form and a timescale, is describing something that does not exist. The safe approach is to close the old scheme by the book, start the new one properly, and put the handful of genuinely unclear points to HMRC for your specific case.

An illustration

This one is invented. A Chilean maker of mining equipment has one service engineer in Sheffield, on a direct payment scheme, paid monthly. Demand grows, the company incorporates a UK subsidiary in March, and the engineer starts working for the new company on 1 June, on the same salary.

The useful decisions were the dull ones. The subsidiary registered as an employer in April, before the payroll was needed. The final pay under the old scheme was May, and the scheme was closed with a cessation date rather than left open. June was the first run on the new scheme, with the engineer's year to date figures used for the tax code, a new payroll identifier, and the pension duties started from the new company's own first payday. The one thing that needed advice, rather than a payroll decision, was whether his four years of service carried over. That went to an employment solicitor before the move, not after it.

Getting it done

If your company is about to have a UK entity, the two halves worth handing over are the closure of the old scheme and the setup of the new one, in the right order and on one date. We do both. If you have not incorporated yet, the PAYE options for a UK subsidiary covers what you are choosing between, and the DPNI explainer covers the scheme you would be leaving.

Common questions

Can we keep the direct payment scheme running once we have a UK company?

Not once the premise has gone. These schemes exist because operating PAYE normally is impracticable, and a UK entity that can run payroll removes that. Where the employee works in the new company's business, the law can make that company responsible anyway, so keeping the old scheme open does not keep the obligation away.

Does the employee's year to date pay carry over to the new company?

No. A new PAYE reference starts year to date figures at zero. Continuity comes through the tax code being operated on the employee's actual pay and tax for the year, not through the totals reported on the new employer's submissions. The two get confused constantly.

Who closes the scheme, us or the employee?

The scheme is the employee's, so the closing submission sits with them or with whoever files on their behalf. In practice it is done alongside the employer's new scheme so the dates line up. HMRC does not publish who it will accept a closure instruction from on these schemes, which is one to settle for your own case rather than assume.

How long does the new scheme take to set up?

HMRC publishes no processing time for employer registration. You must register before the first payday and you cannot register more than two months before it, so the practical answer is to start as soon as the entity exists. If the reference is late, payroll still runs and the submission is sent late, which GOV.UK says in terms.

This page is general information about UK payroll mechanics, not tax, legal or employment advice, and reflects HMRC and GOV.UK guidance as we read it in September 2026. Which scheme applies is HMRC's decision, and continuity of employment is a legal question, so please check your own position or get advice before acting.