The NI can of worms
Having recently left the joys of the mighty hunters galley for civvy street, I decided to become a shiney, so I was interested to read your NI question. With the bit firmly between my teeth I consulted my tax books.
From the oracle (my tax book which is 800+ pages of pure fun), I see that Class 2 NIs are only to be paid by people who are self employed, there is no mention of embassy staff or any other special cases - other than fishermen and volunteer development workers. According to my book, anyone who is employed by HMG in UK (which includes Service people and civil servants), but are deployed temporarily outwith the UK boundaries, should pay full taxes and NI as if they are working in the UK. They are subject to UK laws and liable to pay UK taxes. Incidentally, paying Class 2 NI does preserve your entitlement to UK pensions and other benefits. However, if a self employed person earns more than £5035 (in the tax year 2006/7) they also have to pay Class 4 NI which is 8% of anything over £5035 (ie this is in addition to Class 2 rates).
I can only think that the Diplomatic Service although employed by HMG could be considered to be employed by an organisation outside the UK. This would mean that they would come under the same rules as for instance BAE Systems people working in Saudi, who do not pay tax on money earned in Saudi, (provided they restrict their visits to UK), because it is a different arm of BAE and is registered offshore. However, they can still pay Class 2 NI to secure their UK benefit entitlements. They would not pay the class 4 because their UK earnings would never reach the £5035 threshold.
The question I would ask is if the staff you refer to are locally employed by the embassy (eg secretaries and others who may be dependants of other embassy staff). There is no doubt a special regulation for the Ambassador and his immediate subordinates, but I would expect them to pay UK taxes.
Council tax should definitely only be paid by people occupying houses within the UK. The council tax is paid to the relevant local authority, so it should not be paid to central government. Who would be the local authority? No doubt the house you occupy overseas is a hiring, probably owned by a local person. A lawyer would have a field day!
I normally charge for any work I do, so I will submit my claim through JPA!! Hmmmm maybe I will not bother.
A bit long winded, but I hope you find this helpful.
Shadwell