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Revenue enhancement and social benefit system in the UK, introduced in 1911

National Insurance (NI) is a fundamental component of the welfare state in the U.k.. It acts as a form of social security, since payment of NI contributions establishes entitlement to certain land benefits for workers and their families.

Introduced by the National Insurance Act 1911 and expanded past the Labour authorities in 1948, the arrangement has been subjected to numerous amendments in succeeding years. Initially, it was a contributory grade of insurance confronting illness and unemployment, and somewhen provided retirement pensions and other benefits.^[1]

Currently, workers pay contributions from the age of 16 years, until the age they go eligible for the State pension. Contributions are due from employed people earning at or to a higher place 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 nerveless by HM Revenue and Customs (HMRC). For employees, this is done through the PAYE (Pay Equally Y'all Earn) system forth with Income Tax, repayments of Student Loans and whatever Apprenticeship Levy which the employer is liable to pay.^[2] National Insurance contributions grade a pregnant proportion of the United kingdom Government's revenue, raising £145 billion in 2019-20 (representing 17.five% of all tax revenue).^[3]

The do good 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 [edit]

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 past employed people and their employer. William Martin-Smith was issued with the Starting time NI number A1.^[5] The called ways of recording the contributions required the employer to buy special stamps from a Mail Role 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 chore oftentimes beingness 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 wellness 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 past Regime. The Beveridge Report in 1942 proposed expansion and unification of the welfare land under a scheme of what was called social insurance. In March 1943 Winston Churchill in a broadcast entitled "Later on 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]

Subsequently the 2nd Globe State of 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, responsibility passed in 1948 to the new Ministry of National Insurance. At that indicate, a single stamp was introduced which covered all the benefits of the new Welfare Country.

Stamp cards for class 1 (employed) contributions persisted until 1975 when these contributions finally ceased to be flat-rate and became earnings related, collected forth with Income Tax under the PAYE procedures. Making NI contributions is oftentimes described past people as paying their stamp.^[8]

As the arrangement developed, the link between individual contributions and benefits was weakened.

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 authorities spending. However, any surplus in the funds is invested in government securities, and and then is effectively lent to the government at low rates of interest. National Insurance contributions are paid into the diverse National Insurance Funds later on deduction of monies specifically allocated to the National Health Services (NHS). All the same a modest percentage is transferred from the funds to the NHS from certain of the smaller sub-classes. Thus the 4 NHS organisations are partially funded from NI contributions but not from the NI Fund.^[9] Less than half of do good expenditure (42.one%) now goes on contributory benefits, compared with over 65% in 1978–79 considering of the growth of means-tested benefits since the belatedly 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 United kingdom Parliament. The nigh contempo review was conducted every bit at April 2015, with the report being published two years later.^[eleven]

Contributions [edit]

The contributions component of the organization, "National Insurance Contributions" (NICs) are paid past employees and employers on earnings, and by employers on sure benefits-in-kind provided to employees. The cocky-employed contribute partly by a fixed weekly or monthly payment, and partly on a per centum of net profits above a certain threshold. Individuals may also make voluntary contributions, in club to fill a gap in their contributions tape and thus protect their entitlement to benefits. Contributions are nerveless by HM Revenue and Customs (HMRC) through the PAYE system, forth with Income Tax and repayments of Student Loans and Postgraduate Loans.

People in sure circumstances, such as caring for a kid, caring for a severely disabled person for more 20 hours a week or claiming unemployment or sickness benefits, proceeds National Insurance credits which protects their rights to diverse benefits.^[12]

National Insurance is a significant contributor to U.k. regime revenues, with contributions estimated to comprise 18% of total revenue in the 2019/2020 financial yr.^[xiii]

Contribution classes [edit]

A British 1948 National Insurance postage stamp, once used to collect contributions to the scheme.

National insurance contributions (NICs) autumn into a number of classes. Course 1, 2 and 3 NICs paid are credited to an individual's NI account, which determines eligibility for certain benefits - including the land pension. Class 1A, 1B and 4 NIC do non count towards do good entitlements just must still be paid if due.

Class 1 [edit]

Class one contributions are paid by employers and their employees. In police, the employee contribution is referred to as the 'primary' contribution and the employer contribution as the 'secondary', but they are unremarkably referred to simply equally 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 full to HMRC along with income tax and other statutory deductions. Contributions for employees are calculated on a periodic basis, unremarkably 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 footing, to ensure that the correct level of NICs are collected regardless of how often the managing director chooses to be paid.

At that place 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 another amount decided by the Chancellor. The PT is commonly 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 beneath this limit.
On earnings above the LEL, upwards to and including the PT, employee contributions are not paid simply are credited past the government as if they were (enabling certain low-paid workers to qualify for benefits).
On earnings higher up the LEL, up to and including the ST, employer contributions are not paid.
On earnings above the PT/ST, upwards to and including the UEL, NICs are collected at a rate which is adamant 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 practice so for as long as they remained married and in employment
- Whether the employee is an body of water-going mariner or deep-sea fisherman.
- In the instance of the employer contribution, whether the employee is aged nether 21 or is an apprentice aged under 25.
On earnings above the UEL withal another set of rates apply, this fourth dimension depending only on whether the employee has reached the historic period at which Land Pension becomes payable or is an body of water-going mariner or deep-sea fisherman

Tabular array letters [edit]

As indicated in a higher place, the rates at which an private and their employer pay contributions depend on a number of factors. Consequently, there are many possible sets of employer/employee contribution rates to let for all combinations of the various factors. HMRC classify 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 wait-upwardly tables for each table alphabetic character to assist with manual calculation of contributions, though these days most of the calculations are washed by computer systems and the tables are bachelor only as downloads. In add-on, HMRC provide an online National Insurance Calculator.^[15]

Class 1A [edit]

Form 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 practice not provide whatsoever benefit entitlement for individuals.

Class 1B [edit]

Class 1B contributions were introduced on 6 April 1999 and are payable by employers every bit part of a PAYE Settlement Agreement (an system whereby the employer meets the taxation liabilities on certain benefits). Class 1B contributions are paid at the same rate as Course 1A contributions and do non provide any benefit entitlement for individuals.

Contribution rates [edit]

Contribution rates are ready for each tax year by the authorities.

The general rates for the tax yr 2022/23 betwixt 6 July and five November are shown below.^[16] For those who qualify for the mariners rates, the employee rates are as shown beneath and the non-zero employer rates are 0.v% lower than those shown below.

Employees
Weekly salary	Standard	Reduced	Over retirement historic period
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 calendar week	13.25%	7.i%	0%
Over £967 a calendar week	three.25%	3.25%	0%

Employers
Weekly bacon	Standard	Reduced	Over retirement age	Nether 21 / apprentice under 25
Up to £123 a week	n/a	n/a	northward/a	north/a
£123 to £175 a week	0%	0%	0%	0%
£175.01 to £967 a week	xv.05%	15.05%	15.05%	0%
Over £967 a calendar week	15.05%	xv.05%	15.05%	xv.05%
Class 1A & 1B	15.05%	15.05%	15.05%	15.05%

Class 2 [edit]

Class ii contributions are fixed weekly amounts paid by the self-employed.^[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 Form 1 or 4 can apply for deferment from paying. As of January 2020, self-employed National Insurance Contributions (NICs) will be categorised every bit Class two when profits are betwixt £half-dozen,365 and £8,631.99 a twelvemonth. If a self-employed worker earns £8,632 or more a year they will be categorised equally Class 4. Grade 2 contributions are charged at £three.00 per week and are unremarkably paid by direct debit.^[eighteen] While the amount is calculated to a weekly effigy, they were typically paid monthly or quarterly until 2015. For future years, class 2 is collected as part of the tax self-assessment procedure. For the most part, unlike Grade 1, they practice not class part of a qualifying contribution tape for contributions-based Jobseekers Allowance, simply do count towards Employment and Support Assart.

Form 3 [edit]

Class 3 contributions are voluntary NICs paid by people wishing to fill a gap in their contributions record which has arisen either past not working or by their earnings being too low.

Class iii contributions only count towards Land Pension and Bereavement Do good entitlement. The main reason for paying Class three NICs is to ensure that a person's contribution tape is preserved to provide entitlement to these benefits, though intendance needs to exist taken non to pay unnecessarily as it is not necessary to have contributions in every twelvemonth of a working life in order to authorize.^[19]

Class 4 [edit]

Class four contributions are paid by self-employed people as a portion of their profits.^[17] The corporeality due is calculated with income tax at the end of the yr, based on figures supplied on the SA100 tax return.

Contributions are based around 2 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 form 4 NICs are due on profits up to and including the LPL.
Above the LPL, up to and including the UPL, course 4 NICs are paid at a charge per unit which tin vary simply has been ix% for several years.
Above the UPL, grade 4 NICs are paid at a second rate, which has been two% for several years^[twenty]

Class 4 contributions do not grade function of a qualifying contribution record for any benefits, including the State Pension, as self-employed people authorize for these benefits past paying Grade 2 contributions.

NI credits [edit]

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 Form 1 NICs, though are non paid for. They are granted either to maintain a contributions tape while not working, or to those applying for benefits whose contribution tape is merely slightly brusque of the requirements for those benefits. In the latter case, they are unavailable to fill "gaps" in past years in contribution records for some benefits.

Benefits [edit]

The benefit component comprises a number of contributory benefits of availability and amount adamant by the claimant'due south contribution record and circumstances. Weekly income benefits and some lump-sum benefits to participants upon death, retirement, unemployment, maternity and disability are provided.

Electric current benefits [edit]

Benefits for which there is a contribution condition:

Bereavement benefit
Employment and Support Allowance
Jobseeker's Allowance
Statutory Sick Pay
United kingdom Land Pension

Erstwhile benefits [edit]

Celebrated benefits for which there was a contribution condition:

Incapacity Do good
Invalidity Benefit
State Earnings-Related Pension Scheme
Unemployment Benefit
Widowed Mother's Allowance
Widowed Parent'due south Allowance
Widow'south Alimony

National Insurance number [edit]

To administrate the National Insurance system, a National Insurance number is allocated to every child shortly after their nascency when a merits to Kid Benefit is fabricated. People coming from overseas have to apply for a NI number before they can authorize for benefits, though holding a NI number is not a prerequisite for working in the Great britain. An NI number is in the format: 2 letters, half dozen digits and ane further letter or a space.^[22] The case used is typically QQ123456C. Information technology is usual to pair off the digits - such separators are seen on forms used past authorities departments (both internal and external, notably the P45 and P60).

National Insurance and PAYE Service [edit]

National Insurance contributions for all UK residents and some non-residents are recorded using the NPS estimator organization (National Insurance and PAYE Service). This came into use in June and July 2009^[23] and brought NIC and Income Revenue enhancement records together on one organisation for the start time.

The original National Insurance Recording Organization (NIRS) was a more archaic system first used in 1975 without directly user access to its records. A civil servant working within the Contributions Role (NICO) would take to request newspaper printouts of an individual'due south account which could have up to two weeks to get in. New information to be added to the business relationship would be sent to specialised information entry operatives on paper to be input into NIRS.

NIRS/ii, introduced in 1996, was a large and complex estimator system which had several uses. These included private applications to admission or update an individual National Insurance business relationship, to view employer's National Insurance schemes and a general work direction 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 estimator problems, Deficiency Notices (telling individuals of a possible shortfall in their contributions), which had been sent out on an annual ground prior to 1996, stopped being issued; the Inland Acquirement took several years to articulate the excess.

Contribution rates – employees [edit]

As noted above, the employee contribution was a apartment rate stamp until 1975. After this, the rates have been as follows:^[24] ^[25]

Year	Lower ring	Upper ring	Above upper band
1975–1976	N/A	5.five%	North/A
1976–1978	Due north/A	5.75%	Due north/A
1978–1979	N/A	6.5%	N/A
1979–1980	N/A	6.75%	N/A
1980–1981	N/A	7.75%	North/A
1981–1982	North/A	8.75%	N/A
1982–1989	N/A	ix%	N/A
1989–1994	2%	9%	N/A
1994–1999	2%	10%	North/A
1999–2003	0%	x%	N/A
2003–2011	0%	11%	1%
2011–2022	0%	12%	2%
2022–2023	0%	xiii.25%^[a]	iii.25%^[b]
2023–	0%	12%	2%

On 7 September 2021, the government appear 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 constructive 6 November 2022.^[27]

In the early 2000s the lower threshold for employee contributions was aligned with the standard personal allowance for Income Revenue enhancement merely has since diverged significantly, as illustrated in the following table.

The upper limit is currently set at the figure at which the college charge per unit 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).

Year	NI Employee Threshold	Income Tax Allowance	Charge to NI only
2007-viii	£5,205	£5,225	£xx
2008-9	£5,465	£six,435	£970
2009-10	£5,725	£6,475	£750
2010-xi	£five,725	£6,475	£750
2011-12	£seven,235	£seven,475	£240
2012-13	£7,599	£8,105	£505
2013-fourteen	£7,755	£nine,440	£1,685
2014-15	£7,956	£ten,000	£ii,036
2015-xvi	£viii,060	£x,600	£2,540
2016-17	£8,060	£11,000	£2,940
2017-xviii	£eight,164	£11,500	£three,336
2018-19	£8,424	£xi,850	£3,426
2019-20	£viii,632	£12,500	£3,868
2020-21	£ix,500	£12,500	£3,000
2021-22	£ix,568	£12,570	£3,002
2022-23	£9,880^[c] £12,570	£12,570	£two,690 £0

For 2015-xvi there was therefore upward to £304.80 payable past someone who has not reached the betoken where they are liable for Income Revenue enhancement. This has risen to £352.lxxx 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'south manifesto in the 2019 General Election promised to restore the parity between the NI and Tax thresholds by the terminate of their offset term in office. The limits were harmonised on six July 2022.

The limits and rates for the post-obit tax yr are commonly appear at the same fourth dimension equally the Autumn budget made by the Chancellor of the Exchequer. Electric 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 not-directors of a company). As a issue and unlike UK income revenue enhancement, 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 almanac basis but who has occasional payments above the weekly limit.

A further complication is that an employee has an allowance per employer, dissimilar income revenue enhancement where the allowance is split between employers via the person's taxation lawmaking. Then a person with two low paid jobs would pay less, perchance null, than someone who earned the aforementioned corporeality from one task.

Notes [edit]

^ Returning to 12% from 6 November 2022
^ Returning to two% from half-dozen November 2022
^ Until 5 July 2022

References [edit]

^ The Committee Function, House of Commons. "world wide web.parliament.uk: Select Committee on Social Security Fifth Report, the Contributory Principle: The relationship between tax and National Insurance". Publications.parliament.uk. Retrieved 21 May 2010.
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^ "National Insurance". GOV.UK . Retrieved 11 May 2018.
^ "Ministry of Labour and Ministry of National Insurance: National Insurance Stamps, correspondence". nationalarchives.gov.united kingdom of great britain and northern ireland. Retrieved 30 Oct 2011.
^ "card". Oxford English Dictionary (Online ed.). Oxford Academy Printing. (Subscription or participating institution membership required.)
^ Kynaston, David (2007). A Earth to Build. London: Bloomsbury. p. 24. ISBN9780747585404.
^ Department of the Official Written report (Hansard), Firm of Commons, Westminster. "www.parliament.uk: report on fence which refers to the phrase 'paying the stamp'". Publications.parliament.uk. Retrieved 21 May 2010. {{cite web}}: CS1 maint: multiple names: authors list (link)
^ "Social Security Administration Human activity 1992". Opsi.gov.uk. 6 April 1990. Retrieved 21 May 2010.
^ Seeley, Anthony (x June 2014). "National Insurance contributions : an introduction" (PDF). House of Commons Library. Retrieved 23 December 2018.
^ "Government Actuary's Quinquennial Review of the National Insurance Fund equally at April 2015". gov.uk . Retrieved 21 Nov 2019.
^ Agreement the basic Land Alimony http://world wide web.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/Basicstatepension/DG_10014671
^ "Full Revenue Pie Nautical chart for FY 2020". UK Public Revenue . Retrieved 21 November 2019.
^ HM Treasury. "2011 Budget Report (para 1.128)" (PDF). Archived from the original (PDF) on 1 August 2011. Retrieved 26 March 2011.
^ "NICS estimator". HM Revenue & Customs . Retrieved 21 Nov 2019.
^ "National Insurance rates and categories". gov.uk. UK Regime. Retrieved 21 November 2019.
^ ^a ^b Smith, Jake. "Cocky-employed National Insurance explained". Crisis . Retrieved 21 November 2019.
^ "National Insurance for Express Companies Explained". Gorilla Accounting. eight January 2020. Retrieved 8 January 2020.
^ "HM Revenue & Customs: Practise you demand to height upwards your National Insurance contributions?".
^ HM Acquirement & Community. "Self-employed National Insurance rates". HM Acquirement & Customs. Retrieved 21 Nov 2019.
^ "Not-benefit credits: Overview: What are National Insurance credits".
^ "National Insurance Number". Cabinetoffice.gov.uk. Archived from the original on 24 July 2012. Retrieved 21 May 2010.
^ "Archived copy" (PDF). Archived from the original (PDF) on 7 March 2012. Retrieved 23 July 2009. {{cite web}}: CS1 maint: archived re-create every bit title (link)
^ UK Tax History
^ National Insurance contributions
^ "PM announces i.25% National Insurance hike to pay for social care in England".
^ "National Insurance ascension to exist reversed in November". BBC News. 22 September 2022. Retrieved 22 September 2022.

External links [edit]

Official website
HMRC Up to date national insurance rates tables
National Insurance contribution rates from 1975-76, from the Plant for Fiscal Studies