Aims. Most of our knowledge of the circumnuclear matter in Seyfert galaxies is based on the X-ray spectra of the brightest Compton-thick Seyfert 2 galaxies. The complete obscuration of the nuclear radiation in these sources allows us to study all the components arising from reprocessing of the primary continuum in the circumnuclear matter in detail, while they are heavily diluted in unobscured sources, often down to invisibility. Methods. We present the XMM-Newton RGS and EPIC pn spectra of a long ( 100 ks) observation of one of the soft X-ray brightest Compton-thick Seyfert 2 galaxies, NGC 424. As a first step, we performed a phenomenological analysis of the data to derive the properties of all the spectral components. On the basis of these results, we fitted the spectra with self-consistent photoionisation models, produced with cloudy.Results. The high-energy part of the spectrum is dominated by a pure neutral Compton reflection component and a neutral iron Kα line, together with Kα emission from neutral Ni, suggesting a significant Ni/Fe overabundance. The soft X-ray RGS spectrum comes mostly from line emission from H-like and He-like C, N, O, and Ne, as well as from the Fe L-shell. The presence of narrow RRC from O viii, O vii, and C vi, the last two with resolved widths corresponding to temperatures around 5-10 eV, is a strong indication of a gas in photoionisation equilibrium, as confirmed by the prevalence of the forbidden component in the O vii triplet. Two gas phases with different ionisation parameters are needed to reproduce the spectrum with a self-consistent photoionisation model, any contribution from a gas in collisional equilibrium being no more than 10% of the total flux in the 0.35-1.55 keV band. When this self-consistent model is applied to the 0.5-10 keV band of the EPIC pn spectrum, a third photoionised phase is needed to account for emission lines with higher ionisation potential, although Kα emission from S xv and Fe xxvi remains under-predicted.