Changes to social security coordination rules and National Insurance contributions

With the impact of Covid-19, you would of course be forgiven for allowing Brexit planning to take a bit of a back seat. And yet of course, the UK still completes its transition to full departure from the EU at midnight on 31st December with or without deals in place, and it is therefore important to turn our attention to planning for 1st January 2021 and beyond as much as we can allow.

From 1st January 2021, there will be changes to National Insurance and social security for UK employers who send workers to the EU, the EEA or Switzerland, and for workers from the EU, EEA or Switzerland coming to work in the UK (1). If this applies to you, please read on.

Social security coordination rules before 1st January 2021

If an employee is currently working or begins work in one or more of the EU, EEA countries or Switzerland before 1st January, current European rules will be used to work out which country’s social security scheme employers and employees will have to pay contributions to (1). 

The Withdrawal Agreement details that the current EU social security coordination rules will also continue to apply after 31st December 2020 to certain individuals, ‘whether a future relationship agreement between the UK and the EU on social security coordination is agreed or not’ (1). According to the latest HMRC Employer Bulletin, ‘employers and individuals should continue to apply for PDA1s and E101s as normal if work is to begin before 1st  January 2021 in a situation involving the UK and one or more of the EEA countries and Switzerland’.

You can apply for a PDA1 or E101 using the following forms:

  • CA3822 – for employers sending an employee to work in another country within the EEA
  • CA8421 –for employers with employees who work in two or more of any of the UK, EU, EEA countries or Switzerland.

Either a PDA1 or E101 can be used as evidence that social security coordination rules have been applied and determine the relevant UK National Insurance contributions due.

For a PDA1 or E101 that starts before 1st January, National Insurance contributions will be paid for the duration stated in the document. If the end date is after 31st December 2020, employees will need to clarify the immigration rules in the country they will be working in (1). 

Please note that Part Two of the Withdrawal Agreement ‘does not protect the right to work in countries they are not resident in unless they are a UK national with rights as a frontier worker by 31 December 2020’ (1). A frontier worker is defined as ‘a person who resides in either the UK or the EU, EEA or Switzerland who works in one or more of those countries but not the one they reside’ (1). 

In instances where an employee’s home is or has been in the UK, but both the employer and employee have been paying UK National Insurance contributions despite them not residing in the EU to UK at the time, (for example aircrew workers) both parties may be eligible for a refund of the contributions (1). You can find out more here.

Social security coordination rules after 1st January 2021

Employers should still apply for PDA1 or E101 certificates for employees who will start working in one of more of the EU, EEA countries or Switzerland after 31st December 2020. At the time of writing, HMRC will only be able to process PDA1 or E101 applications within scope of the Withdrawal Agreement. More guidance on this is due to be released in due course.

EU, EEA and Swiss workers coming to the UK 

Employers and employees will not have to pay UK National Insurance for the period stated in the PDA1 if: 

  • the worker is from the EU, EEA or Switzerland,
  • they are employed before 1 January 2021 and 
  • have a PDA1 which shows they are subject to an EEA country or Swiss social security legislation

This is the case even if their PDA1 certificate ends after 31st December 2020, so long as their situation remains unchanged (1). If the certificate shows they are subject to UK social security legislation, both the employee and employer must pay UK National Insurance (1).

The latest Employer Bulletin highlights that ‘if you employ an individual from the EU, EEA or Switzerland who does not have a PDA1 and they work in two or more of any of the UK, EU, EEA countries or Switzerland, you or the employee should apply for a PDA1 to the social security institution of the country where they reside’.

EU, EEA or Swiss national employees should also consider registering for settled or pre-settled status under the EU Settlement Scheme by 30th June 2021.

Future relationships and social security arrangements

For those individuals not in scope of the Withdrawal Agreement and the related agreements with EEA, EFTA countries and Switzerland, the government has indicated that there will be changes to future social security arrangements. We await more information on this in due course.

A reciprocal agreement has been reached with Ireland which ‘ensures that social security coordination continues after 31 December 2020 when considering moves by UK or Irish nationals between the UK and Ireland’ (1). Social security arrangements will be made on the same terms that are currently in place.

Employers, agents and trade bodies have been asking for clarity on social security arrangements post December 2020 for many months and sadly COVID-19 means this, like so many Brexit-related decisions, has not had the priority it deserves, leaving employers and employees with little time to make crucial global mobility decisions. This has been made worse of course by the fact that many employees are still displaced across Europe working in locations where there had been no expectation that they would be impacted by these issues.  Whilst understandably a lot of the focus on displaced workers has been about the corporate tax exposure of creating a permanent establishment in a country where the business had not previously been trading, the social security aspect adds an additional layer of cost and concern for both employers and employees.     

Sources and resources

  1. Employer Bulletin October 2020
  2. EU Settlement Scheme
  3. UK/Ireland: Convention on Social Security