Split Pay: Guide for UK Employers

Split pay is an arrangement where an employee’s salary is divided into portions and paid into multiple bank accounts or allocated across different countries or currencies. It’s often used for employees working internationally or those who need their earnings managed for specific financial arrangements. For example, split pay may benefit expatriate employees who require part of their salary in their home country to cover expenses while working abroad.

Employers considering split pay must carefully manage payroll systems to ensure accurate allocation and compliance with tax laws in all relevant jurisdictions. For international arrangements, it is important to consider exchange rate fluctuations, local payroll regulations, and social security contributions. Failure to comply with these requirements could lead to financial penalties or reputational harm.

Importantly, employees also have to be informed of how split pay will affect their earnings, tax obligations, and benefits. Transparency is key to avoiding misunderstandings.

 

What is split pay?

 

Split pay is a payroll arrangement where an employee’s salary is divided into two or more parts and paid into separate bank accounts or allocated across different currencies or countries. This arrangement is often used for employees with international roles or unique financial requirements.

For example, an expatriate working abroad may receive part of their salary in the currency of their host country to cover living expenses, while the remaining portion is paid in their home country to manage ongoing financial commitments like mortgages or savings.

Split pay can also be used domestically if an employee requests their salary to be divided across multiple bank accounts, such as one for household expenses and another for savings.

Split pay is most common in multinational companies with expatriate workers, global assignments or businesses that pay staff in multiple currencies.

 

 

Split pay for overseas assignees

 

Deploying employees on overseas assignment raises multiple procedural and practical issues for employers, including how best to approach remuneration. One option when paying oversees assignees is to use split pay, but this comes with pros and cons.

Split pay is a compensation strategy used by employers to manage the salaries of employees on overseas assignments. Under this arrangement, the employee’s salary is divided between two currencies: the host-country currency and the home-country currency. A portion of the salary is paid in the host currency to cover living expenses abroad, while the remaining salary is retained in the home currency for expenses in the employee’s home country.

An overseas assignee’s compensation package is typically divided into two parts:

 

• Spendable Income: This portion, also known as “goods and services income,” is allocated for daily living expenses in the host country, such as food, transportation, and childcare. It is generally paid in the host currency to ensure that employees have sufficient funds for their immediate needs abroad.
• Non-Spendable Income: This portion covers savings and other obligations in the home country, such as mortgages, education, and retirement contributions. It is retained in the home currency and reflects the part of the salary not required for day-to-day expenses in the host location.

 

A Cost-of-Living Allowance (COLA) is often applied to the spendable income to address differences in the cost of goods and services between the host and home countries. The allowance ensures that employees maintain a similar standard of living regardless of location. For example, COLA compensates for higher costs of groceries, clothing, transportation, and recreation in the host country.

By paying the spendable portion in the host currency, employers protect employees against currency fluctuations for everyday expenses. COLA calculations typically use cost-of-living indices linked to inflation and exchange rates, ensuring fair compensation for increased living costs. The remaining non-spendable portion is paid in the home currency, allowing employees to manage long-term financial commitments without exposure to exchange rate volatility.

 

Why is split pay used for overseas assignees?

 

Determining the currency in which to pay an overseas assignee can present challenges for employers, as any chosen approach is susceptible to dissatisfaction from either the assignee or local management. For instance, a UK employee on assignment in the United States may feel disadvantaged if paid in pound sterling when the pound weakens, leading to a reduction in their purchasing power. In such cases, the employee might expect an exchange loss allowance to offset the impact. Conversely, if the pound strengthens, the same employee could enjoy a windfall when converting pounds into US dollars, which might cause dissatisfaction among local management who view this as an unwarranted advantage. Paying entirely in US dollars merely reverses the dynamic, creating similar conflicts.

Currency fluctuations and exchange rate volatility significantly influence an assignee’s perceived and actual compensation. These factors also affect the calculation of Cost-of-Living Allowances (COLA), making the decision on payment currency far from straightforward. A split pay arrangement can often resolve these challenges by dividing the assignee’s salary between the home and host currencies. The portion paid in the host-country currency covers daily living expenses, while the portion retained in the home-country currency addresses savings and infrequent expenses incurred outside the host country.

The primary goal for both employers and employees is stability. An assignee is more likely to feel satisfied with an arrangement that neutralises the effects of currency and inflation fluctuations. Most employees perceive a “no gain/no loss” approach as fair, where their financial position is neither advantaged nor disadvantaged by their assignment. By adopting a split pay approach, employers can strike this balance, much like the use of home-based COLA calculations. This method ensures that an assignee’s purchasing power matches their home-country standards while they are living abroad, allowing for equitable compensation and minimising dissatisfaction on both sides.

 

How does split pay compare to other pay strategies for overseas workers?

 

Assessing the different pay delivery approaches when it comes to how an assignee’s salary is paid can help to understand how this all works. Below we look at both a host currency and home currency approach, comparing these with the split pay approach.

 

Host currency approach

 

The first option for the employer is to pay the assignee their entire salary in the host-country currency, so both the spendable income portion and the non-spendable part. In this scenario, the spendable income portion of the assignee’s salary will be protected by any cost-of-living adjustment made by the employer, but the remaining portion will be exposed to currency fluctuations that might result in loss and gains for the assignee.

There is also something fundamentally flawed in the logic of this payment approach, where much of the non-spendable income amount will be used in the home country. As such, it makes absolutely no sense to provide this part of the salary entirely in the host currency.

In the context of the risks involved, the net effect is therefore as follows:

 

• Spendable income (paid in the host currency): there will be no risk, provided this portion of the assignee’s salary is protected by a cost-of-living allowance
• Non-spendable income (also paid in the host currency): there will be significant risk if this is subsequently converted into the assignee’s home currency.

 

 

Home currency approach

 

The second option is to pay the assignee their entire salary in the home-country currency. In this scenario, the non-spendable income paid in the home currency and spent in the home country is protected. The home currency approach also provides some stability, provided that the home currency stays strong. However, there is still a risk with the home currency approach, where the assignee must convert the spendable income into the host currency to pay for day-to-day living expenses. This means that the timing of the exchange could lead to a potentially pronounced loss or gain for the assignee if currency volatility is high.

In the context of the risks involved, the net effect is therefore as follows:

 

• Spendable income (paid in the home currency): there will be some risk if this part of the pay is converted abroad
• Non-spendable income (also paid in the home currency): there will be no risk if this part of the pay is spent at home, with some limited risk if spent abroad.

 

 

Split pay approach

 

When comparing the risks involved with the first two approaches, the split pay approach often appears to be the most logical option. This is because the spendable income, which is intended to be spent in the host country, is paid in the host currency. Equally, the non-spendable income, which is intended to be spent at home, is paid in the home currency.

In the context of the risks involved, the net effect is therefore as follows:

 

• Spendable income (paid in the host currency): there will be no risk, provided this portion of the assignee’s salary is protected by a cost-of-living allowance
• Non-spendable income (paid instead in the home currency): there will be no risk if this part of the pay is spent at home, with some limited risk if spent abroad.

 

Pros & cons of split pay

 

There are various different types of compensation strategies, or combinations of strategies, that can be used for overseas assignees. However, when comparing the different payment approaches to currency when it comes to paying salary, a split pay approach has clear advantages, limiting the risk of there being any pronounced gain or loss either way.

For the employer, the ideal scenario when deciding on a compensation package for overseas assignments is that the assignee should neither gain nor lose from differentials in either living costs or fluctuations in exchange rates. By splitting the assignee’s compensation package into two parts, and by applying a split pay approach to these separate portions of the assignee’s salary, this can go a long way to achieving a “no gain, no loss” balance sheet.

For overseas assignees, the split pay approach can also be perceived as the best way forward, where they will often feel psychologically satisfied that, even though they may not benefit from any windfall, they will be able to maintain the same standard of living as back home while on assignment in the host country. In turn, this will minimise the risk of any conflict or complaints, where everyone on the employer’s payroll feels fairly treated.

However, the split pay approach is not necessarily viable for every overseas assignment, where splitting the assignee’s salary payment between the home- and host-country currencies may cause problems in some cases. In particular, in countries with high inflation and/or weak currencies, such as in Eastern Europe, Africa and Latin America, employers should either pay in the home country currency or in a third “hard” currency. When setting an overseas payment policy, the employer may also need to take into account any specific laws and currency transfer restrictions for the host country. As with many issues that can arise in the context of overseas assignments, there is no “one-size-fits-all” approach.

 

Implementing split pay

 

When running a split payroll system for overseas assignees, much will depend on the proportion of spendable and non-spendable income to which the different currencies will be applied. Ideally, an employer would set a percentage of the assignee’s spendable income that exactly matches the needs of that individual. In this way, the spendable income would reflect what the employee needs in the host location for daily living expenses.

However, the reality is that the employer can only identify spending patterns, rather than being able to exactly match the spending behaviour of each individual assignee. As such, one option when implementing a split pay system could be to allow the assignee the flexibility to decide the percentage of their salary that will be paid in the host currency.

For example, where the employer sets a spendable income at 50% of total after-tax income (where this is the figure used to calculate any COLA), they could provide assignees with the option to have between 25% and 75% of the salary paid in the host currency.

Applying this example to a British expatriate on assignment in the USA who elects to receive 75% of their salary in US dollars, the 25% paid in pound sterling and spent in the UK is unlikely to create any problems. Equally, the cost-of-living index will be applied to the 50% of the salary paid in US dollars, where the spendable income is therefore protected from both inflation and exchange rate fluctuations by the index. As for the remaining 25% paid in US dollars, but not covered by the COLA adjustment, the employee can gain or lose on this amount due to exchange rate fluctuations. However, a possible approach would be to guarantee this 25% of the salary against fluctuations. In this way, the employer would cover any losses but also keep any gains, if the currency fluctuates more than say 10%.

However, regardless of what approach is decided upon by the employer, by having a clearly defined policy as to how adjustments will be made for overseas assignees to reflect the cost of living, and in what currency the overseas assignee will be paid, this will help to set expectations and provide financial reassurance. Before an overseas assignee even accepts an assignment in a host country, they will need to make an informed decision as to the fairness of any approach taken and if this is likely to leave them short. By giving employees much needed peace of mind, this is likely to result in a much higher acceptance rate.

 

Split pay for UK-based workers

 

Split pay for UK-based workers is an arrangement where an employee’s salary is divided and paid into multiple bank accounts. While traditionally associated with international assignees, split pay is increasingly being used domestically to offer employees greater flexibility in managing their finances. This arrangement allows workers to allocate specific portions of their earnings for different purposes, such as household expenses, savings, or paying off loans.

For UK employers, offering split pay can serve as a valuable benefit that supports financial well-being among employees. Many workers appreciate the convenience of automated salary distribution, as it helps them manage their budgets more effectively. For instance, an employee could arrange for a portion of their salary to go directly into a savings account each month, fostering better financial discipline and reducing the temptation to spend unnecessarily.

Employers may also consider split pay as a way to accommodate diverse employee needs. This could include situations where an employee has joint financial commitments with a partner or family member and requires a portion of their salary to be paid into a shared account. Similarly, split pay can be beneficial for employees repaying student loans or other debts, as it ensures timely and consistent payments.

While split pay offers numerous advantages, it does require careful implementation. Employers must ensure that their payroll systems can accurately manage multiple payments for each employee. Errors in salary allocation can lead to delays or financial inconvenience for staff, potentially impacting morale and trust in the organisation. Transparent communication is essential to avoid misunderstandings about how split pay works, particularly regarding payment dates and account details.

Another consideration is compliance with employment and tax regulations. Employers must ensure that all payments comply with UK tax laws, including National Insurance and PAYE obligations, regardless of how salaries are split. Proper record-keeping and payroll audits are critical to avoiding disputes or penalties.

For employees, split pay offers a tailored approach to financial management, enabling them to prioritise their spending and savings goals. For employers, it demonstrates a commitment to supporting staff well-being and financial stability. By implementing split pay effectively, UK employers can enhance employee satisfaction, promote retention, and foster a more engaged and motivated workforce. Ultimately, split pay is a flexible and practical solution that benefits both employees and employers alike.

 

Need assistance?

 

For specialist advice on remuneration, benefits and payroll strategies, contact us.

 

Split pay FAQs

 

What is split pay?

Split pay is an arrangement where an employee’s salary is divided and paid into multiple bank accounts. It allows workers to allocate their earnings for specific purposes, such as savings, household expenses, or debt repayment.

 

How does split pay benefit employees?

Split pay helps employees manage their finances more effectively by automatically directing portions of their salary to different accounts. This can support budgeting, encourage saving, and ensure timely payments for shared expenses or debts.

 

Can any UK employer offer split pay?

Yes, split pay can be implemented by any UK employer, provided their payroll system is capable of handling multiple payments for individual employees. It is typically offered as an optional benefit for employees who request it.

 

Does split pay affect tax and National Insurance contributions?

No, split pay does not change the amount of tax or National Insurance contributions owed. Employers must calculate these deductions as usual, based on the employee’s total salary, before distributing the net amount across the specified accounts.

 

What are the risks of split pay for employers?

Employers must ensure their payroll systems handle split payments accurately. Errors, such as delays or incorrect allocations, can inconvenience employees and damage trust. Compliance with tax regulations and proper record-keeping is also essential.

 

How do employees set up split pay?

Employees should inform their employer of their preference for split pay and provide the necessary account details, including how much of their salary should be allocated to each account.

 

Does split pay impact pay dates?

No, split pay does not change the agreed-upon pay date. All payments are made simultaneously, ensuring employees receive their salary on time in all specified accounts.

 

Is split pay only available for full-time employees?

No, split pay can be offered to any employee, regardless of whether they work full-time, part-time, or on a flexible schedule.

 

What happens if account details change?

Employees should notify their employer immediately if their account details change. Employers must update payroll records promptly to ensure payments continue without disruption.

 

Why should employers consider offering split pay?

Offering split pay demonstrates a commitment to supporting employees’ financial well-being. It can enhance job satisfaction, improve retention, and create a more engaged workforce.

 

Glossary

 

 

Term	Definition
Split Pay	A payroll arrangement where an employee’s salary is divided into portions and paid into multiple bank accounts.
Payroll System	Software or processes used by employers to calculate employee salaries, deductions, and disbursements.
Net Salary	The amount of an employee’s pay remaining after deductions for tax, National Insurance, and other obligations.
National Insurance (NI)	A UK government tax on earnings used to fund state benefits like healthcare and pensions.
PAYE (Pay As You Earn)	The UK system through which income tax is deducted from employees’ wages by their employer before payment.
Budgeting	The process of managing income and expenses to achieve financial stability and goals.
Savings Account	A type of bank account designed to hold money for future use, often with interest on the balance.
Shared Account	A joint bank account used by multiple individuals, such as partners or family members, for shared expenses.
Debt Repayment	The process of paying back borrowed money, such as student loans or personal loans.
Financial Well-Being	The state of being in control of one’s finances and able to meet current and future financial needs.
Employee Retention	The ability of an employer to keep employees in their roles over time, reducing turnover.
Tax Compliance	Adherence to laws and regulations governing the payment of taxes by both employers and employees.
Record-Keeping	Maintaining accurate and organised documentation of payroll, tax, and payment information.
Payment Errors	Mistakes in salary disbursement, such as incorrect amounts or delays, which can impact employees and employers.
Flexible Benefits	Workplace perks or services, such as split pay, that are tailored to support employees’ needs and preferences