National Insurance (NI) is a system of taxes paid by workers and employers, used primarily to fund 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 and expanded by the Labour government in 1948, and has been subject to numerous amendments in subsequent years.
The contributions component of the system, “National Insurance Contributions” (NICs), is 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 (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 discussed that the link between an individual’s contribution record and the remaining contributory benefits will be weakened further.