National Insurance
National Insurance 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 Attlee ministry 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.
Currently, workers pay contributions from the age of sixteen 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 through 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. For employees, this is done through the PAYE system along with income tax, repayments of student loans and any apprenticeship levy which the employer is liable to pay. National Insurance contributions form a significant proportion of the UK Government's revenue, raising £145 billion in 2019-20.
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.
History
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. 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.Initially there were two schemes running alongside each other, one for health and pension insurance benefits 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."
Following 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 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.
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. 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. Less than half of benefit expenditure now goes on contributory benefits, compared with over 65% in 1978–79 because of the growth of means-tested benefits since the late 1970s.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.
Contributions
The contributions component of the system, "National Insurance Contributions" 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 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, can gain National Insurance credits which protects their rights to various benefits.
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.
Contribution classes
National insurance contributions 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, Primary Threshold, Secondary Threshold and Upper Earnings Limit, 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.
- 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.
- 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
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.