National Insurance

National Insurance (NI) is a tax system in the United Kingdom paid by workers and employers for funding state benefits. Initially, it was a contributory form of insurance against illness and unemployment, and eventually provided retirement pensions and other benefits.[1] Citizens pay National Insurance contributions to become eligible for State Pension and other benefits. Anyone 16 years old and above are mandated to pay National Insurance provided the employee earns more than £162 a week or the individual is self-employed and makes a profit of £6,205 or more annually. It is necessary to obtain a National Insurance number before starting to pay contributions.[2]

NI was first introduced by the National Insurance Act 1911 and expanded by the Labour government in 1948. The system was subjected to numerous amendments in succeeding years.

Employees and employers pay for National Insurance contributions on certain benefits provided to employees. Self-employed persons contribute partly through a fixed weekly or monthly payment, and partly on a percentage of net profits above a certain threshold. Individuals may also make voluntary contributions to fill a gap in their contributions record and thus protect their entitlement to benefits. Contributions from employees are collected by HM Revenue and Customs (HMRC) through the PAYE system, along with Income Tax, repayments of Student Loans and any Apprenticeship Levy which the employer is liable to pay.

Employers include PAYE in their payroll. it refers to the "HM Revenue and Customs’ (HMRC) system for the collection of Income Tax and National Insurance from employment."[3]

The benefit component includes several contributory benefits of availability and amount 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.

National Insurance contributes a significant part of the government's revenue (21.5% of the total collected by HMRC[4]). The structure of National Insurance was modified to remove the fixed upper contribution limits, with a much lower rate paid by employees on income above a certain level.

The National Insurance Fund

The Government Actuary estimated the 2012-13 results for the National Insurance Fund to be as follows:[5]

£ billions (2012/13)
Payments Income
Basic State Pension (including Christmas bonus) 79.321
Widows'/Bereavement benefits 0.571
Incapacity Benefit 2.591
Unemployment benefit & support 3.463
Maternity allowance & guardians allowance 0.373
Administrative costs & transfers 4.693
Total 91.012 84.263