You have a UK subsidiary. Do you still need a DPNI scheme?
This comes up in two directions. A group opens a UK company and wants to know whether the direct payment scheme it was told about is now unnecessary, or a group that already has a UK subsidiary is told by someone that its new UK hire needs one. Both are asking the same thing, and both usually get an answer built on the group structure. That is the wrong place to look.
The short version. A UK subsidiary usually does remove the need for a direct payment scheme, but not because the group has an entity here. It is because a subsidiary tends to satisfy one of two tests at once, and either of them is enough on its own. Where neither is satisfied, a direct scheme can still be the right route despite the subsidiary sitting there.
The group structure is not the test
HMRC's conditions for a direct payment arrangement are set out in their PAYE manual at PAYE75040, and they are about the employment rather than the group. There has to be assessable employment income, a likely tax liability, someone able to operate PAYE correctly on their own income, and, the condition that does the work here, no employer to operate PAYE, or it being impractical for the employer to do so. The same page tells HMRC staff to consider first whether PAYE can be operated in the normal way for the person involved, and lists overseas employers with no presence in the United Kingdom among the cases where there is no employer to do it.
So the question is never "does the group have a UK company". It is whether somebody in the UK is on the hook for running the payroll. Three things settle that, and they are worth taking in order.
One: who is the employer?
Start with the contract, because it identifies the employer, and the employer is who the tests then apply to. If the subsidiary is the employer, you are on the ordinary route: it registers a PAYE scheme in its own name and runs payroll like any other UK company. There is nothing left for a direct scheme to do. If the parent is still the employer, keep going.
Two: does that employer have a UK tax presence of its own?
PAYE has a territorial limit. HMRC set this out at PAYE81610, citing the Oceanic decision, and the test is whether the employer making the payments has a tax presence here. They regard a branch or agency in the UK, or a UK representative office, as establishing one. They are explicit that having employees in the UK does not, and nor does using UK banking or legal services. What they say they need is something similar to a branch or agency, office or establishment, and a UK address where they can contact the employer, send PAYE literature and, if necessary, enforce compliance.
A subsidiary is a separate company, not a part of the parent, so it is not any of those things by default. But whether it amounts to one in practice depends on what it actually does for the parent, and that is a question of fact rather than something you can read off a group chart. Worth noting for anyone who has a branch instead: once a tax presence exists, HMRC can look to it to operate PAYE even where the employees are paid from outside the UK.
Three: does the employee work in the subsidiary's business?
This is the one that catches people, and it is where most subsidiary questions actually get answered. Where an employer outside the UK with no place of business here makes its employees available to work in a UK business, the law treats that UK business as their employer. HMRC's employer guide, CWG2, says it plainly and gives the two common shapes: workers supplied by a foreign agency, or employees loaned from a foreign company linked to yours. The second one is a parent and its subsidiary. The UK business then carries both the employee's and the employer's National Insurance and has to register as an employer if it has not already.
The same idea runs through PAYE. Section 689 of ITEPA 2003 treats a UK entity that is not the employer, but for whom the employee works, as making the payments and so having to operate PAYE, and PAYE81511 says that applies automatically where the PAYE regulations do not reach either the real employer or whoever pays the employee. CWG2 puts the practical version in one sentence: the business in the UK using the services of an employee of an overseas employer must operate PAYE as if it was the employer.
Three situations, and what each one needs
Run your own case against these. Most groups recognise themselves in one of the three within a sentence or two.
The subsidiary employs them.
No direct scheme. The subsidiary registers its own PAYE scheme and files in real time like any UK employer, with employer's National Insurance, pension duties and the rest sitting on it. If an employee is moving onto this from an existing direct scheme, the order of work matters more than the decision does, and moving an employee from a DPNI to a full UK payroll sets out the sequence. Otherwise the ground is covered in your PAYE options with a UK subsidiary.
The parent employs them, and they work in the subsidiary's business.
Still no direct scheme, and the reason surprises people. The host business rule can make the subsidiary responsible for PAYE and both sides of National Insurance whatever the contract says and whoever pays the salary. Nobody has to transfer the employment for that to happen. A direct scheme opened alongside it would sit on top of an obligation that is already somebody else's, which is the sort of thing that ends in two employment records for one person and a tax code nobody can explain.
The parent employs them, and the subsidiary has nothing to do with their work.
A direct scheme can still be right. This is the case that gets missed. Think of a group whose UK company sells spare parts into the local market while the employee in question works for the parent's overseas division and never touches the subsidiary's business. The parent may well have no tax presence of its own, no UK business is using the employee's services, and the PAYE75040 conditions can be met with the subsidiary sitting there the whole time. It is also the case where you most want the answer in writing, because the facts are the only thing holding it up.
If a direct route is still in play, which one?
There is more than one, they are different schemes with different registrants, and the deciding factor is whether employer's National Insurance is due rather than anything about the subsidiary. The table is a map, not a decision. The scheme type is confirmed with HMRC when the scheme is set up.
| Route | Whose name | Covers | Who pays HMRC |
|---|---|---|---|
| DPNI (PAYE20100). | The employee's name. | Income tax, and the employee's own National Insurance. | The employee. |
| NI-only scheme (PAYE20120). | The employer's name. | Primary and secondary National Insurance, so the employer's contributions too. Income tax needs its own route, through Self Assessment or a separate tax-only scheme. | The employer, or a UK agent it appoints. |
| DCNI (PAYE20090). | The employee's name. | The employee's own National Insurance only, with income tax through Self Assessment. HMRC use it in the cases that page sets out, so it is not something to ask for. | The employee. |
| The employer's own UK PAYE scheme. | The employer's name. | Everything an ordinary UK payroll covers. | The employer. |
That last row is the one people forget they have. PAYE81511 recognises that an employer without a UK presence may choose to operate PAYE voluntarily, and for a group that has already incorporated here, running the payroll in the employer's own name is often closer to what it wanted than a scheme in its employee's name. Employers in the EU, the EEA and Switzerland are in a different position again, because the social security agreements put employer's National Insurance on them, and that points at an NI-only scheme in the employer's own name rather than anything in the employee's. Which direct scheme applies goes through the fork properly.
Four things that decide nothing
Each of these gets offered as the answer, usually with some confidence, and none of them settles it.
Who pays the salary
CWG2 closes this off in as many words: where a UK business is using an employee's services, it must operate PAYE as if it was the employer, and that holds whether the employee is paid by the UK business, by the overseas employer, or partly by both. Paying from head office does not move the obligation, it just means the UK business has to go and get the figures before it can report them.
What the group chart says
The contract tells you who the employer is, which is question one and genuinely matters. It does not tell you whether a UK company is treated as the employer for PAYE and National Insurance, because that turns on who the employee works for in practice. A group can have the paperwork entirely in order and still find the subsidiary carrying the obligation.
That the subsidiary is dormant
A company that does no business cannot be a host employer for someone doing no work for it, so this is not irrelevant. It is just narrower than people hope. It does not decide question two, which is about the parent, and it stops being true the moment the subsidiary starts using the employee. The position moves on that date, not on the date somebody notices.
Which route you would prefer
A direct scheme looks cheaper and lighter than a full payroll, and for a single employee it often is. That is not a reason it applies. HMRC's conditions are conditions, and the host business rule arrives on its own without asking anybody. If the answer you want is a direct scheme and the facts point at the subsidiary, the honest options are to change the facts or to accept the answer.
An illustration
A marine equipment manufacturer based in Durban has a small UK company in Southampton, incorporated three years ago to hold stock and sell spare parts to yards along the south coast. Two people work there, both employed by that company, both on its own PAYE scheme. Fine so far.
Now the parent hires a technical trainer who lives in Newcastle. She is employed by the South African company, she travels to customer sites across Africa and the Middle East delivering training on the parent's equipment, and she has nothing to do with the spare parts business in Southampton. The group assumed the Southampton company would simply put her on its payroll, because that is where the PAYE scheme already is.
On the facts it should not. The trainer does no work for the UK company, so the host business rule does not reach her and putting her on that scheme would record the wrong employer. The parent has no branch, agency or representative office here, and the subsidiary is a separate company rather than part of it. South Africa has no social security agreement with the UK, so no employer's National Insurance arises for the parent, which is what the agreements with the EU, the EEA and Switzerland would otherwise do. The route to put to HMRC is a direct scheme for her, with the Southampton company left alone, and the scheme type confirmed at setup.
Change one fact and it flips. If she spent half her time training the Southampton team's customers on the UK company's behalf, that company would be using her services and the answer changes with it. Details are illustrative and invented.
Get the answer in writing before the first payday
We work through who the employer is, what the UK company is actually doing with the employee, and whether employer's National Insurance is in play, then apply for the scheme those facts support and deal with HMRC while it is set up. If the answer turns out to be an ordinary PAYE scheme, we will say so.
Get startedCommon questions
We have a UK subsidiary. Can our UK employee still be on a direct payment scheme?
Sometimes, but not because of the structure either way. PAYE75040 requires that there is no employer to operate PAYE, or that it is impractical for the employer to do so. A subsidiary that employs the person removes that. A subsidiary whose business the person works in can be treated as the employer anyway. A subsidiary with no connection to the work removes neither, and a direct scheme can still be right.
Does having a UK subsidiary give the overseas parent a UK tax presence?
Not automatically. PAYE81610 names a branch or agency in the UK, or a UK representative office, and describes what HMRC need as something similar to a branch, agency, office or establishment, with a UK address they can use to contact the employer and enforce compliance. A separate group company is none of those by default. Whether it is one in substance depends on what it does for the parent.
Our subsidiary is dormant and employs nobody. Does that change the answer?
Less than you would think. It cannot be a host employer for work it is not receiving, so the analysis returns to the parent and to what the employee does. It is still a live company with its own filing duties, and the day it starts using the employee's services is the day the position changes.
Who decides which scheme applies?
HMRC, on the facts. Who employs the person, whether that employer has a UK presence, whether a UK business is using their services, and whether employer's National Insurance is due. Those point at a route, and the scheme type is confirmed with HMRC at setup. Anyone naming a scheme before that is predicting.
Could the overseas parent just run its own UK PAYE scheme?
Yes, and it is often the better fit once a group has a UK company. PAYE81511 recognises that an employer with no UK presence may choose to operate PAYE voluntarily, and PAYE75040 tells HMRC staff to consider whether PAYE can be operated in the normal way before agreeing a direct arrangement. The scheme then sits in the employer's name, with the employer paying HMRC.
Read next
- Overseas company with a UK subsidiary: your PAYE options, for the ordinary route once the subsidiary is the employer.
- Moving an employee from a DPNI to a full UK payroll, for the sequencing when a scheme has to close.
- DPNI vs DCNI: which direct scheme applies, for the fork between the direct routes.
- EOR, DPNI or subsidiary: how to employ someone in the UK, if the entity decision is still open.
- Employer's National Insurance explained, for the cost that sits behind the fork.
General information about UK payroll obligations, not tax or legal advice, and current as at September 2026. The HMRC manual and guidance references are given so you can check them at source. Whether a direct payment scheme fits depends on your own facts and is confirmed with HMRC at setup, so please get advice on your specific position before acting.