UK employees are subject to UK National Insurance Class 1 on their earnings. For this category, earnings include cash remuneration, including holiday and sick pay and certain benefits in kind, plus shares and the exercise of a share option.
For mobile workers or those on secondment to another country, there is always the issue of where they are required to pay social security contributions – in the country in which their work is carried out, or in the country where they live, or in both, or neither. Although the default position is that a person is required to pay social security in the country where work is performed, where an employee is working abroad for a temporary period, they may be allowed to continue paying social security contributions in their home country only. The income tax rules do not apply as an employee could pay income tax in one country but be liable to pay social security in another country.
From a UK National Insurance Contributions (NIC) perspective, there are 3 categories of countries.
Category A: Reciprocal social security agreement countries, including countries with whom the UK has entered into a reciprocal social security agreement, for example, USA, Canada, Japan, New Zealand, and more.
Social security agreements exist for 3 main reasons – to ensure contributions are not paid twice on the same earnings, offer some protection to social security benefit entitlements, and ensure contributions are payable somewhere. The provisions within agreements can differ significantly, and it is crucial to consider the separate agreements as the need arises.
For example, say a UK company seconds a UK employee to work in the USA. Under the terms of the agreement:
- The employee remains in the UK NIC system for 5 years
- No US social security contributions are paid
- The individual would pay income tax in the USA but NICs in the UK.
The UK company is required to obtain a certificate of continuing liability for the period of the secondment.
These rules remain unchanged post-Brexit.
Category B: Countries not in the EEA, with no reciprocal agreement in place – for example, China, Australia, India, and more (Rest of the world countries for NICs purposes)
Social security contributions are generally paid in the host country, where the employee is working. For example, say an employee gets seconded from the UK to Australia for a period of time. The employee could pay voluntary UK NICs to preserve entitlement to benefits.
In some situations, NICs liability could continue for the first 52 weeks of the secondment. This is possible if the following conditions are satisfied:
- The employee is employed by a UK established business
- The employee is ordinarily resident in the UK
- Immediately before the start of the employment abroad, the employee was resident in the UK.
In the example above, a UK established business seconds an ordinarily UK resident employee to Australia for 3 months. In that case, the employee would continue paying UK NICs for the three months of their secondment, and no contributions are due in Australia.
In the cases where secondment exceeds 52 weeks, then host country social security is due from week 53 of the assignment.
These rules remain unchanged post-Brexit.
Category C: EEA + Switzerland – including the EU countries plus Norway, Iceland, Lichtenstein, and Switzerland.
UK/EU Social Security regulations applied until 31 December 2020. Under these rules, a detached worker on an assignment that was not expected to continue for more than 2 years remained in the home country social security system, and the employer obtained a certificate of coverage (A1 portable document). Those rules covered postings up to 5 years (2 years, which could be extended to 5 provided that the authorities’ approval is obtained). Otherwise, the employee would have paid social security in the country where duties are carried out.
The UK-EU Trade and Co-operation Agreement was agreed on 24 December 2020. The agreement includes a protocol on social-security coordination between countries.
The rules for detached workers apply broadly as they did before. For postings up to 2 years, the employees remain in the home country’s social security system. However, there is no longer the option for extension. Any employee whose assignment continues for more than 2 years must contribute to the host country’s social security system, and home country contributions stop.
Under the UK-EU Trade and Co-operation Agreement, each country had an option to opt-in or out of the detached worker rules before 01 Feb 2021.
Where the country failed to opt-in, cross-border employee movements are treated either under the reciprocal agreement in place, or where that is missing, as a ‘rest of the world’ country.
The new rules do not cover Norway, Iceland, Lichtenstein, Gibraltar, or Switzerland, as special rules apply to those countries.
Employees will require a certificate of coverage (or similar document) to carry on paying social security contributions in their home country only. Whether this will be the old A1 or a new form remains to be seen.
Failure to obtain the required documentation means that contributions should be charged in the country where the work is carried out.
Working abroad pre-January 2021
Some workers will be working in the EU/EEA on a posting that straddles 1 January 2021.
Assignments that began before 31 December 2020 are covered by the transitional arrangement in the EU Withdrawal Agreement. Workers who were posted between the UK and the EU/EEA (including Norway, Switzerland, Iceland, and Liechtenstein) before 1 January 2021 are protected by the Withdrawal Agreement, which states that individuals “shall be covered for as long as they continue without interruption to be in one of the situations …. involving both a Member State and the United Kingdom.”
This means that a posted worker with a valid A1 certificate who remains on their posting will continue to be covered by that A1 certificate, so NICs / social security contributions will remain payable in their home country (and not the host country).
The existing A1 will also cover pre-January 2021 postings to and from any EU State that decides to opt-out of the new detached worker rules.
Should you need assistance on this topic, do not hesitate to reach out to our Immedis Tax Team.