National Insurance (NI) is a fundamental component of the welfare state in the United Kingdom. It acts as a form of social security, since payment of NI contributions establishes entitlement to certain state benefits for workers and their families.
Introduced by the National Insurance Act 1911 and expanded by the Labour government in 1948, the system has been subjected to numerous amendments in succeeding years. Initially, it was a contributory form of insurance against illness and unemployment, and eventually provided retirement pensions and other benefits.[1]
Currently, workers pay contributions from the age of 16 years, until the age they become eligible for the State pension. Contributions are due from employed people earning at or above a threshold called the Lower Earnings Limit, the value of which is reviewed each year. Self-employed people contribute partly through a fixed weekly or monthly payment and partly on a percentage of net profits above a threshold, which is reviewed periodically. Individuals may also make voluntary contributions to fill a gap in their contributions record and thus protect their entitlement to benefits.
Contributions are collected by HM Revenue and Customs (HMRC). For employees, this is done through the PAYE (Pay As You Earn) system along with Income Tax, repayments of Student Loans and any Apprenticeship Levy which the employer is liable to pay.[2] National Insurance contributions form a significant proportion of the UK Government's revenue, raising £145 billion in 2019-20 (representing 17.5% of all tax revenue).[3]
The benefit component includes several contributory benefits, availability and amount of which is determined by the claimant's contribution record and circumstances. Weekly income and some lump-sum benefits are provided for participants upon death, retirement, unemployment, maternity and disability. In order to obtain the benefits which are related to the contributions, a National Insurance number is necessary.[4]
History
A 1940 contribution card for an employed woman.
The current system of National Insurance has its roots in the National Insurance Act 1911, which introduced the concept of benefits based on contributions paid by employed people and their employer. William Martin-Smith was issued with the First NI number A1.[5] The chosen means of recording the contributions required the employer to buy special stamps from a Post Office and affix them to contribution cards. The cards formed proof of entitlement to benefits and were given to the employee when the employment ended, leading to the loss of a job often being referred to as being given your cards, a phrase which endures to this day although the card itself no longer exists.[6]
Initially there were two schemes running alongside each other, one for health and pension insurance benefits (administered by "approved societies" including friendly societies and some trade unions) and the other for unemployment benefit which was administered directly by Government. The Beveridge Report in 1942 proposed expansion and unification of the welfare state under a scheme of what was called social insurance. In March 1943 Winston Churchill in a broadcast entitled "After the War" committed the government to a system of "national compulsory insurance for all classes for all purposes from the cradle to the grave."[7]
After the Second World War, the Attlee government pressed ahead with the introduction of the Welfare State, of which an expanded National Insurance scheme was a major component. As part of this process, in 1948, a single stamp was introduced which covered all the benefits of the new Welfare State. At that point, responsibility passed to the new Ministry of National Insurance; many of the former approved societies went into liquidation as a result.
Stamp cards for class 1 (employed) contributions persisted until 1975 when these contributions finally ceased to be flat-rate and became earnings related, collected along with Income Tax under the PAYE procedures. Making NI contributions is still often described by people as paying their stamp.[8]
As the system developed, the link between individual contributions and benefits was weakened.
National Insurance Fund
The National Insurance Funds are used to pay for certain types of welfare expenditure and National Insurance payments cannot be used directly to fund general government spending. However, any surplus in the funds is invested in government securities, and so is effectively lent to the government at low rates of interest. National Insurance contributions are paid into the various National Insurance Funds after deduction of monies specifically allocated to the National Health Services (NHS). However a small percentage is transferred from the funds to the NHS from certain of the smaller sub-classes. Thus the four NHS organisations are partially funded from NI contributions but not from the NI Fund.[9] Less than half of benefit expenditure (42.1%) now goes on contributory benefits, compared with over 65% in 1978–79 because of the growth of means-tested benefits since the late 1970s.[10]
An actuarial evaluation of the long-term prospects for the National Insurance system is mandated every 5 years, or whenever any changes are proposed to benefits or contributions. Such evaluations are conducted by the Government Actuary's Department and the resulting reports must be presented to the UK Parliament. The most recent review was conducted as at April 2020, with the report being published two years later.[11]
Contributions
The contributions component of the system, "National Insurance Contributions" (NICs) are paid by employees and employers on earnings, and by employers on certain benefits-in-kind provided to employees. The self-employed contribute partly by a fixed weekly or monthly payment, and partly on a percentage of net profits above a certain threshold. Individuals may also make voluntary contributions, in order to fill a gap in their contributions record and thus protect their entitlement to benefits. Contributions are collected by HM Revenue and Customs (HMRC) through the PAYE system, along with Income Tax and repayments of Student Loans and Postgraduate Loans.
People in certain circumstances, such as caring for a child, caring for a severely disabled person for more than 20 hours a week or claiming unemployment or sickness benefits, gain National Insurance credits which protects their rights to various benefits.[12]
National Insurance is a significant contributor to UK government revenues, with contributions estimated to comprise 18% of total revenue in the 2019/2020 financial year.[13]
Contribution classes
A British 1948 National Insurance stamp, once used to collect contributions to the scheme.
National insurance contributions (NICs) fall into a number of classes. Class 1, 2 and 3 NICs paid are credited to an individual's NI account, which determines eligibility for certain benefits - including the state pension. Class 1A, 1B and 4 NIC do not count towards benefit entitlements but must still be paid if due.
Class 1
Class 1 contributions are paid by employers and their employees. In law, the employee contribution is referred to as the 'primary' contribution and the employer contribution as the 'secondary', but they are usually referred to simply as employee and employer contributions.
The employee contribution is deducted from gross wages by the employer, with no action required by the employee. The employer then adds in their own contribution and remits the total to HMRC along with income tax and other statutory deductions. Contributions for employees are calculated on a periodic basis, usually weekly or monthly depending on how the employee is paid, with no reference to earnings in previous periods. Those for company directors are calculated on an annual basis, to ensure that the correct level of NICs are collected regardless of how often the director chooses to be paid.
There are a number of milestone figures which determine the rate of NICs to be paid. These are the Lower Earnings Limit (LEL), Primary Threshold (PT), Secondary Threshold (ST) and Upper Earnings Limit (UEL), though often the PT and ST are set to the same value. The cash value of most of these figures normally changes each year, either in line with inflation or by some other amount decided by the Chancellor. The PT is normally indexed to inflation using the CPI, while other thresholds remain indexed using the RPI.[14]
On earnings below the LEL, no NICs are paid because no benefits accrue on earnings below this limit.
On earnings above the LEL, up to and including the PT, employee contributions are not paid but are credited by the government as if they were (enabling certain low-paid workers to qualify for benefits).
On earnings above the LEL, up to and including the ST, employer contributions are not paid.
On earnings above the PT/ST, up to and including the UEL, NICs are collected at a rate which is determined by a number of factors:
Whether the employee has reached the age at which State Pension becomes payable
Whether the employee is a married woman paying reduced-rate contributions. This facility was abolished on 11 May 1977 but women who were already paying these contributions at that time were allowed to opt to continue to do so for as long as they remained married and in employment
Whether the employee is an ocean-going mariner or deep-sea fisherman.
In the case of the employer contribution, whether the employee is aged under 21 or is an apprentice aged under 25.
On earnings above the UEL yet another set of rates apply, this time depending only on whether the employee has reached the age at which State Pension becomes payable or is an ocean-going mariner or deep-sea fisherman
Table letters
As indicated above, the rates at which an individual and their employer pay contributions depend on a number of factors. Consequently, there are many possible sets of employer/employee contribution rates to allow for all combinations of the various factors. HMRC allocate a letter of the alphabet, referred to as an 'NI Table Letter', to each of these sets of contribution rates. Employers are responsible for allocating the correct table letter to each employee depending on their particular circumstances.
Each tax year, HMRC publish look-up tables for each table letter to assist with manual calculation of contributions, though these days most of the calculations are done by computer systems and the tables are available only as downloads. In addition, HMRC provide an online National Insurance Calculator.[15]
Class 1A
Class 1A contributions were introduced from 6 April 1991, and are paid by employers on the value of company cars and certain other benefits in kind provided to their employees and directors, at the standard employer contribution percentage rate for the tax year. Class 1A contributions do not provide any benefit entitlement for individuals.
Class 1B
Class 1B contributions were introduced on 6 April 1999 and are payable by employers as part of a PAYE Settlement Agreement (an arrangement whereby the employer meets the tax liabilities on certain benefits). Class 1B contributions are paid at the same rate as Class 1A contributions and do not provide any benefit entitlement for individuals.
Contribution rates
Contribution rates are set for each tax year by the government.
The general rates for the tax year 2023/24 between 6 January and 5 April 2024 are shown below.[16] For those who qualify for the mariners rates, the employee rates are as shown below and the non-zero employer rates are 0.5% lower than those shown below.
Employees
Weekly salary
Standard
Reduced
Over retirement age
Up to £123 a week
n/a
n/a
n/a
£123.01 to £242 a week
0%
0%
0%
£242.01 to £967 a week
10%
3.85%
0%
Over £967 a week
2%
2%
0%
Employers
Weekly salary
Standard
Reduced
Over retirement age
Under 21 / apprentice under 25
Up to £123 a week
n/a
n/a
n/a
n/a
£123 to £175 a week
0%
0%
0%
0%
£175.01 to £967 a week
13.8%
13.8%
13.8%
0%
Over £967 a week
13.8%
13.8%
13.8%
13.8%
Class 1A & 1B
13.8%
13.8%
13.8%
13.8%
Class 2
Class 2 contributions are fixed weekly amounts paid by the self-employed until 5 April 2024.[17] They are due regardless of trading profits or losses, but those with low earnings can apply for exemption from paying and those on high earnings with liability to either Class 1 or 4 can apply for deferment from paying. As of January 2020, self-employed National Insurance Contributions (NICs) will be categorised as Class 2 when profits are between £6,365 and £8,631.99 a year. If a self-employed worker earns £8,632 or more a year they will be categorised as Class 4. Class 2 contributions are charged at £3.00 per week and are usually paid by direct debit.[18] While the amount is calculated to a weekly figure, they were typically paid monthly or quarterly until 2015. For future years, class 2 is collected as part of the tax self-assessment process. For the most part, unlike Class 1, they do not form part of a qualifying contribution record for contributions-based Jobseekers Allowance, but do count towards Employment and Support Allowance.
Class 3
Class 3 contributions are voluntary NICs paid by people wishing to fill a gap in their contributions record which has arisen either by not working or by their earnings being too low.
Class 3 contributions only count towards State Pension and Bereavement Benefit entitlement. The main reason for paying Class 3 NICs is to ensure that a person's contribution record is preserved to provide entitlement to these benefits, though care needs to be taken not to pay unnecessarily as it is not necessary to have contributions in every year of a working life in order to qualify.[19]
Class 4
Class 4 contributions are paid by self-employed people as a portion of their profits.[17] The amount due is calculated with income tax at the end of the year, based on figures supplied on the SA100 tax return.
Contributions are based around two thresholds, the Lower Profits Limit (LPL) and the Upper Profits Limit (UPL). These have the same cash values as the Primary Threshold and Upper Earnings Limit used in Class 1 calculations.
No class 4 NICs are due on profits up to and including the LPL.
Above the LPL, up to and including the UPL, class 4 NICs are paid at a rate which can vary but has been 9% for several years.
Above the UPL, class 4 NICs are paid at a second rate, which has been 2% for several years[20]
Class 4 contributions do not form part of a qualifying contribution record for any benefits, including the State Pension, as self-employed people qualify for these benefits by paying Class 2 contributions.
NI credits
People who are unable to work for some reason may be able to claim NI credits (technically credited earnings, since 1987[21]). These are equivalent to Class 1 NICs, though are not paid for. They are granted either to maintain a contributions record while not working, or to those applying for benefits whose contribution record is only slightly short of the requirements for those benefits. In the latter case, they cannot be used to fill "gaps" in past years in contribution records for some benefits.
Benefits
The benefit component comprises a number of contributory benefits of availability and amount determined by the claimant's contribution record and circumstances. Weekly income benefits and some lump-sum benefits to participants upon death, retirement, unemployment, maternity and disability are provided.
Current benefits
Benefits for which there is a contribution condition:
To administer the National Insurance system, a National Insurance number is allocated to every child shortly after their birth when a claim to Child Benefit is made. People coming from overseas have to apply for a NI number before they can qualify for benefits, though holding a NI number is not a prerequisite for working in the UK. An NI number is in the format: two letters, six digits and one further letter or a space.[22] The example used is typically QQ123456C. It is usual to pair off the digits - such separators are seen on forms used by government departments (both internal and external, notably the P45 and P60).
National Insurance and PAYE Service
National Insurance contributions for all UK residents and some non-residents are recorded using the NPS computer system (National Insurance and PAYE Service). This came into use in June and July 2009[23] and brought NIC and Income Tax records together on one system for the first time.
The original National Insurance Recording System (NIRS) was a more archaic system first used in 1975 without direct user access to its records. A civil servant working within the Contributions Office (NICO) would have to request paper printouts of an individual's account which could take up to two weeks to arrive. New information to be added to the account would be sent to specialised data entry operatives on paper to be input into NIRS.
NIRS/2, introduced in 1996, was a large and complex computer system which had several uses. These included individual applications to access or update an individual National Insurance account, to view employer's National Insurance schemes and a general work management application. There was some controversy regarding the NIRS/2 system from its inception when problems with the new system attracted widespread media coverage.
Due to these computer problems, Deficiency Notices (telling individuals of a possible shortfall in their contributions), which had been sent out on an annual basis prior to 1996, stopped being issued; the Inland Revenue took several years to clear the backlog. As a result, many customers were unaware whether they had incomplete years of contributions towards their State Pension (including women affected by the rise in State Pension age).
Contribution rates – employees
As noted above, the employee contribution was a flat rate stamp until 1975. After this, the rates have been as follows:[24][25]
On 7 September 2021, the government announced an increase of NI rates by 1.25 percentage points for the 2022–23 tax year, breaking its 2019 manifesto promise. From 2023, a new health and social care levy charged at the 1.25% rate would be introduced with NI rates reverting to their previous rates.[26] This move was reversed by new chancellor Kwasi Kwarteng effective 6 November 2022.[27]
In the early 2000s the lower threshold for employee contributions was aligned with the standard personal allowance for Income Tax but has since diverged significantly, as illustrated in the following table.
The upper limit is currently set at the figure at which the higher rate of Income Tax becomes chargeable for a person on the standard personal allowance for Income Tax in all parts of the UK except Scotland (which can set its own level for the tax threshold, but not for the NI upper limit).
For 2015–16 there was therefore up to £304.80 payable by someone who has not reached the point where they are liable for Income Tax. This has risen to £352.80 for 2016–17, to £400.32 for 2017–18, to £411.12 for 2018-19 and to £464.16 for 2019–20. This fell to £360 for 2020–21.
The current government's manifesto in the 2019 general election promised to restore the parity between the NI and Income Tax thresholds by the end of their first term in office. The limits were harmonised on 6 July 2022.
The limits and rates for the following tax year are normally announced at the same time as the autumn budget made by the Chancellor of the Exchequer. Current rates are shown on the hmrc.gov.uk website.
The calculation of contributions for employees has to be made on each pay period (for non-directors of a company). As a result and unlike Income Tax, a weekly paid employee will face a charge in any week where earnings exceed 1/52 of the annual limit. It is therefore possible for a charge to arise on someone who earns below the limit on an annual basis but who has occasional payments above the weekly limit.
A further complication is that an employee has an allowance per employer, unlike income tax where the allowance is split between employers via the person's tax code. So a person with two low paid jobs would pay less, possibly nothing, than someone who earned the same amount from one job.
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers. 401(k) payable is a general ledger account that contains the amount of 401(k) plan pension payments that an employer has an obligation to remit to a pension plan administrator. This account is classified as a payroll liability, since the amount owed should be paid within one year.
A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may include withholding the employee portion of insurance contributions or similar social benefit taxes. In most countries, they are determined by employers but subject to government review. PAYE is deducted from each paycheck by the employer and must be remitted promptly to the government. Most countries refer to income tax withholding by other terms, including pay-as-you-go tax.
Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the employer, but almost all economists agree that the true economic incidence of a payroll tax is unaffected by this distinction, and falls largely or entirely on workers in the form of lower wages. Because payroll taxes fall exclusively on wages and not on returns to financial or physical investments, payroll taxes may contribute to underinvestment in human capital, such as higher education.
The Federal Insurance Contributions Act is a United States federal payroll tax payable by both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.
In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.
The State Earnings Related Pension Scheme (SERPS), originally known as the State Earnings Related Pension Supplement, was a UK Government pension arrangement, to which employees and employers contributed between 6 April 1978 and 5 April 2002, when it was replaced by the State Second Pension.
In the United Kingdom, a P60 is a statement issued to taxpayers at the end of a tax year. It is important a taxpayer does not destroy the P60 forms issued to them, as they form a vital part of the proof that tax has been paid. They were also issued in Ireland until the 2018 tax year.
In the United Kingdom, a tax return is a document that must be filed with HM Revenue & Customs declaring liability for taxation. Different bodies must file different returns with respect to various forms of taxation. The main returns currently in use are:
Taxation in Ireland in 2017 came from Personal Income taxes, and Consumption taxes, being VAT and Excise and Customs duties. Corporation taxes represents most of the balance, but Ireland's Corporate Tax System (CT) is a central part of Ireland's economic model. Ireland summarises its taxation policy using the OECD's Hierarchy of Taxes pyramid, which emphasises high corporate tax rates as the most harmful types of taxes where economic growth is the objective. The balance of Ireland's taxes are Property taxes and Capital taxes.
Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.
The National Insurance number is a number used in the United Kingdom in the administration of the National Insurance or social security system. It is also used for some purposes in the UK tax system.
The State Second Pension (S2P), or Additional State Pension, was introduced in the UK by the Labour Government on 6 April 2002, to replace the SERPS. The main aim of this change was to skew existing Additional Pension (AP) benefits in favour of low and moderate earners at the expense of higher earners and to extend access to include certain carers and people with long-term illness or disability for the first time.
IR35 is the United Kingdom's anti-avoidance tax legislation, the intermediaries legislation contained in Chapter 8 of Income Tax Act 2003. The legislation is designed to tax 'disguised' employment at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary, i.e. their own limited company, and whose relationship with their client is such that had they been paid directly they would be employees of the client.
Pensions in the United Kingdom, whereby United Kingdom tax payers have some of their wages deducted to save for retirement, can be categorised into three major divisions - state, occupational and personal pensions.
In the UK, every person paid under the PAYE scheme is allocated a tax code by HM Revenue and Customs. This is usually in the form of a number followed by a letter suffix, though other 'non-standard' codes are also used. This code describes to employers how much tax to deduct from an employee. The code is normally based provided to HMRC by the taxpayer or their employer.
For the Old Age, Survivors and Disability Insurance (OASDI) tax or Social Security tax in the United States, the Social Security Wage Base (SSWB) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed. The Social Security tax is one component of the Federal Insurance Contributions Act tax (FICA) and Self-employment tax, the other component being the Medicare tax. It is also the maximum amount of covered wages that are taken into account when average earnings are calculated in order to determine a worker's Social Security benefit.
In the United Kingdom statutory sick pay (SSP) is paid by an employer to all employees who are off work because of sickness for longer than 3 consecutive workdays (or 3 non-consecutive workdays falling within an 8-week period) but less than 28 weeks and who normally pay National Insurance contributions (NICs), often referred to as earning above the Lower Earnings Limit (LEL). Days on which the employee would normally have worked are referred to as qualifying days; the first three of these, known as waiting days, are unpaid unless the employee has qualified for SSP within the previous 8 weeks and this included waiting days. Between 13 March 2020 and 25 March 2022, SSP was also paid from the first qualifying day if the employee was self isolating on medical advice relating to COVID-19. SSP is £109.40 per week for 2023/24. SSP is not paid to a number of categories of employees, including:
Median household disposable income in the UK was £29,400 in the financial year ending (FYE) 2019, up 1.4% (£400) compared with growth over recent years; median income grew by an average of 0.7% per year between FYE 2017 and FYE 2019, compared with 2.8% between FYE 2013 and FYE 2017.
Cycle to Work scheme is a UK Government tax exemption initiative introduced in the Finance Act 1999 to promote healthier journeys to work and to reduce environmental pollution. It allows employers to loan cycles and cyclists' safety equipment to employees as a tax-free benefit. The exemption was one of a series of measures introduced under the Government's Green Transport Plan. A Cycle to Work scheme does not require the prior approval of HMRC.
Statutory Maternity Pay is an employee benefit, part of the provision of parental leave in the United Kingdom.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
