Brexit – What about the people? All about social security (NIC)

Following her first article about Brexit and its effect on personal income tax, here is Melissa Dunkley’s second article in the series which looks at social security (what we call NIC in the UK). 

Melissa’s company, MD Advisory Limited, is a specialist tax adviser, dealing with the tax and social security position for expatriates.  She advises on both UK nationals going overseas and foreign nationals coming into the UK.  Email her at: melissa@mdadvisory.co.uk

In the first article of the series we looked at personal income tax for UK nationals working in the EU and EU nationals working in the UK, and concluded that Brexit would not change much. So now let’s look at social security (what we call NIC in the UK).  Will that be affected?  OMG, yes!

I’m not going to focus on the availability of maternity pay or job seeking in another EU country. These are articles focused on workers and their employers. There are a lot of them out there who are correctly paying into the relevant tax and social security systems and they didn’t get much of a mention during the referendum or since.

For employers, social security is simply a cost. They have to contribute the employer’s percentage and get nothing for it except a corporate tax deduction. For employees, social security typically equates to little more than entitlement to a state pension. Let’s set the record straight on one thing before we go any further, entitlement to use the NHS does not come from paying NIC. The NHS is funded for the most part by the tax system and you are entitled to use it if you reside in the UK.

So, if you are a UK national going to work in the EU or an EU national coming to work in the UK, do you pay NIC or the other country’s equivalent? What does it do to your state pension?

The answer is you follow the rules in the social security agreement that exists for members of the EU (and EEA countries and Switzerland). Put simply, that agreement says that you pay in only one country at any given time and it should be the country in which you work, unless it’s a short time secondment (up to five years), then you can apply to stay in your home country’s system.  If you are working in multiple EU countries at the same time, there’s a set of rules to say which is the one and only country in which you pay.  The employer always pays in the same country as the employee.

Once Brexit happens, the UK is no longer in the EU and is no longer party to this agreement. Therefore, unless some special agreement is reached during the Brexit negotiations, one of two options will happen.
Before the UK joined the EU, there were individual social security agreements between the UK and some EU countries, France and Germany for example.  We could revert back to these but these haven’t been updated since before the UK joined the EU, so they’re in need of some work.  Besides which, has anyone still got a copy?  Remember also that at the time the UK went into the EU, a country called Yugoslavia existed, so there are a lot of EU members with whom no old social security agreement exists because they didn’t exist back then.

The other option is that we simply operate the rules that exist for nationals that come from other countries, with which the UK does not have a social security agreement, and there are many of those. In this scenario a UK national going on secondment to another EU country would most likely continue to have to pay NIC for the first year. They would also be liable to pay in the other country according to that country’s own rules. So that’s double “taxation” and there’s nothing you can do about it. If that EU country is France, that’s 12% UK + 20% FR for the employee and 13.8% UK + 48% FR for the employer, give or take.  So, you might get a pension in the future but you’ve got nothing to live on today.

And what about the state pension?  Most countries have a system whereby you have to contribute for a minimum number of years to get any pension at all.  In the UK the minimum is currently 10 years. Without the rules contained in the EU social security agreement, if you worked and paid in for 40 years but in five different EU countries, you would not get a state pension from any of them unless you reached each country’s minimum number of years.  However, the EU social security agreement contains provisions whereby you consider the contribution period across all member countries, i.e. 40 years, so that you qualify.  You then get effectively a proportion of the full pension from each country in which you’ve paid.
The other important point about pensions is inflation protection.  A UK resident receiving a UK state pension has their pension amount increased each year in line with whichever inflationary measure the government adopts.  Due to the non-discriminatory rules of the EU, an EU or UK pensioner living in the EU also gets the same inflationary increases each year.  However, a pensioner living in any other country does not.

If you retired today on the new basic pension of £159.55 a week, you would get the same £159.55 a week for the rest of your days.  If you don’t think £159.55 will buy you much today, imagine how much it won’t buy you in 20 or 30 years.

So, in summary, will leaving the EU have any effect on NIC?  Most definitely, yes.  Have we had any information yet about what might happen post departure? No.