National Insurance (NI) in the United Kingdom is a system of contributions paid by workers and employers, towards the cost of certain state benefits. It was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits. It was first introduced by the National Insurance Act 1911, expanded by the Labour government in 1948 and has been subject to numerous amendments in subsequent years.
The contributions component of the system currently consists of mandatory contributions, National Insurance Contributions (NICs), 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.
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.
Recent developments of the system have meant that National Insurance provides a significant part of the government's revenue (£96.5 billion in 2010-2011, 21.5% of the total collected by HMRC.) National Insurance has also become more redistributive over time as its structure has changed to remove the fixed upper contribution limits, albeit with a much lower rate payable by employees on income above a certain level. It has been mooted that the link between individual's contribution record and the remaining contributory benefits will be weakened further.
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 persons and their employer. 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 (administered by "approved societies" including friendly societies and some trade unions) and the other for unemployment benefit which was administered directly by Government.
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, responsibility passed in 1948 to the new Ministry of National Insurance. At that point a single stamp was introduced which covered all the benefits of the new Welfare State.
Stamp cards for class 1 (employed) contributions persisted until 1975 when these contributions finally ceased to be flat-rate and became earnings related and were collected along with Income Tax under the PAYE procedures. Older Britons continue to describe making NI contributions as paying their stamp.
As the system developed, the link between individual contributions and benefits was weakened.
The National Insurance Fund is nominally hypothecated, and National Insurance payments cannot be used directly to fund general government spending. However, surplus in the fund 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 classes of National Insurance after deduction of monies specifically allocated to the National Health Service (NHS). However a small percentage is transferred from the fund to the NHS from certain of the smaller sub-classes. Thus the NHS is partially funded from NI contributions but not from the NI Fund.
In the early twenty-first century, governments sometimes announced that income tax rates had not increased, while increasing revenue by increasing the rates and scope of NI. The unfairness of a tax that is levied on the wage income of all workers but not on dividend or interest income has also been criticised: a low-paid worker must pay NI on his income, while a wealthy owner of income-bearing assets does not.
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.
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, responsibility passed in 1948 to the new Ministry of National Insurance. At that point a single stamp was introduced which covered all the benefits of the new Welfare State.
Stamp cards for class 1 (employed) contributions persisted until 1975 when these contributions finally ceased to be flat-rate and became earnings related and were collected along with Income Tax under the PAYE procedures. Older Britons continue to describe making NI contributions as paying their stamp.
As the system developed, the link between individual contributions and benefits was weakened.
The National Insurance Fund is nominally hypothecated, and National Insurance payments cannot be used directly to fund general government spending. However, surplus in the fund 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 classes of National Insurance after deduction of monies specifically allocated to the National Health Service (NHS). However a small percentage is transferred from the fund to the NHS from certain of the smaller sub-classes. Thus the NHS is partially funded from NI contributions but not from the NI Fund.
In the early twenty-first century, governments sometimes announced that income tax rates had not increased, while increasing revenue by increasing the rates and scope of NI. The unfairness of a tax that is levied on the wage income of all workers but not on dividend or interest income has also been criticised: a low-paid worker must pay NI on his income, while a wealthy owner of income-bearing assets does not.
Contribution classes
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.Description above from the Wikipedia article National Insurance,More
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