Tax resident does not mean social security resident in the United Kingdom

The statutory residence test (SRT) is the key to determining UK tax residence for a particular tax year. Recent legislative changes have also made tax residence under the SRT the deciding factor for inheritance tax exposure. Conversely, residence under the SRT does not determine where an individual is liable to pay social security. 

Social security contributions

Social security is governed by rules separate from the SRT, which can cause a mismatch for UK workers. For example, you may be non-UK tax resident but remaining liable for UK national insurance contributions, particularly if you leave the UK temporarily to work overseas. Conversely, if you are moving to the UK, you may be considered a UK tax resident before becoming liable for national insurance contributions. 

Social security exposure is determined primarily by ordinary residence, which is different to tax residence under the SRT. 

Domestic rules

Ordinary residence for social security purposes is a matter of fact determined under domestic law. It considers whether the individual keeps a UK home; where their family is located; their long-term plans in respect of remaining or returning to the UK; and the overall pattern and purpose of time spent abroad. An individual’s ordinary residence status is an important factor in determining their social security obligations.

Leaving the UK 

An individual who remains ordinarily resident in the UK may continue to be liable for UK national insurance contributions when temporarily working overseas, even though they have ceased to be UK tax resident.

Moving to the UK 

The same principle applies if you are coming to the UK to work. Certain individuals arriving in the UK from overseas may be exempt from UK national insurance contributions for an initial 52-week period, provided the relevant conditions are satisfied. 

This is particularly important as in many cases national insurance contributions can only be collected via payroll, which means it is due in real time throughout the year when the individual is paid. This is unlike many other UK taxes which can be rectified after the year end.

Social security agreements 

The position is further varied depending on whether the UK has a social security agreement with the country where you are working, or the county from which you are coming to the UK. These agreements can determine which country’s social security system applies, overwriting the ordinary residence determination. In some circumstances, you can remain within the UK social security system while temporarily working overseas. 

To remain within a social security framework while working elsewhere, proactive steps are needed to obtain a certificate of coverage for the original jurisdiction, hereby exempting you from contributions in the other state. 

The rules and processing times vary between countries, so it is important to proactively check the agreement that applies to your circumstances, and obtain the relevant paperwork prior to commencing the role. 

Importantly, the existence of a double tax agreement between the UK and the other jurisdiction does not dictate the existence of a social security agreement, nor would social security obligations be addressed in the tax treaty. 

What to consider

If you are moving abroad, coming to the UK, or working across multiple jurisdictions, you should consider your tax residence and social security position separately. 

You will need to consider the following:

• Where are you physically conducting your employment?
• Are you resident or ordinary resident for UK national insurance contribution purposes?
• How long will you be working overseas or in the UK?
• Does the UK have a social security agreement with the country?
• Do you need a certificate of coverage?
• If there is no agreement, could the UK 52-week national insurance coverage rules apply?

To be entitled to a UK state pension and certain other state benefits, an individual needs to meet the relevant contribution and eligibility requirements. This can make continued UK contributions advantageous even when working abroad.

In summary, do not treat social security as an afterthought to the tax residence analysis. Get the position right before the assignment starts because your social security position affects payroll, compliance, benefits, and, potentially, your future entitlement to state benefits.

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Nikki Martin is a chartered tax adviser in the international tax team at Carpenter Box. She advises internationally mobile and high-net-worth clients on residency, domicile, global mobility, inheritance tax, trusts, and family investment structures.