What Are National Insurance Contributions (NICs)?
A National Insurance Contribution (NIC) is a tax paid by British employees and employers to fund UK government benefits programs. These contributions are made through payroll deductions and are based on factors such as age and earnings. To make NICs, individuals need a National Insurance number assigned by the government. The NIC system functions similarly to the Federal Insurance Contributions Act (FICA) in the U.S.
Key Takeaways
- National Insurance Contributions are taxes paid by employees and employers in the UK.
- The term covers universal healthcare, public pensions, and unemployment benefits.
- Employees can make voluntary payments to increase their eventual pension amount.
How National Insurance Contributions (NICs) Work
National Insurance is a tax paid by individuals and corporations in the United Kingdom. It functions as a withholding tax, much like FICA in the United States. Both employees and employers contribute, with the employer collecting through payroll deductions. Self-employed individuals pay both shares. Employers consistently report these contributions to HM Revenue and Customs (HMRC).
To start paying, individuals must have a National Insurance number (NIN), which is akin to a Social Security number (SSN). Applications for a NIN can be made online. This number is unique to each person, ensuring contributions are correctly allocated.
Taxpayers making NICs must meet these criteria:
- Be 16 or older
- Earn more than £242 weekly or, if self-employed, have an annual profit over £12,570
Employees can also voluntarily contribute to qualify for higher pension amounts in the future. Self-employed individuals and UK citizens working abroad can similarly make voluntary contributions.
Programs Funded by National Insurance Contributions
NICs support a range of benefit programs by categorizing employees into classes. Below are some classes and the corresponding benefits:
| Programs | Employees | Self-Employed | Voluntary Contributions |
|---|---|---|---|
| Basic State Pension | ✔ | ✔ | ✔ |
| Additional State Pension | ✔ | ||
| New State Pension | ✔ | ✔ | ✔ |
| New Style Jobseeker’s Allowance | ✔ | ||
| Employment and Support Allowance (Contribution-Based) | ✔ | ✔ | |
| Maternity Allowance | ✔ | ✔ | |
| Bereavement Support Payment | ✔ | ✔ |
The basic State Pension in the UK is £156.20 weekly, while the full new State Pension is £203.85 per week.
Categories and Rates for National Insurance Contributions
Employees fall into varying categories based on circumstances:
| Category | Description |
|---|---|
| A | General employees |
| B | Married women and widows (reduced NI) |
| C | Individuals over the State Pension age |
| H | Apprentices under 25 |
| J | Individuals who can defer payments due to multiple employers |
| M | Individuals 21 and under |
| V | Veterans at their first job |
| Z | Individuals 21 and under who can defer payments due to multiple employers |
Employees who don’t make NICs are categorized with the letter X.
Each classification corresponds to different rates based on weekly earnings:
| Category | £123 to £242 | £242.01 to £967 | Over £967 |
|---|---|---|---|
| A | 0% | 12% | 2% |
| B | 0% | 5.85% | 2% |
| C | N/A | N/A | N/A |
| H | 0% | 12% | 2% |
| J | 0% | 2% | 2% |
| M | 0% | 12% | 2% |
| V | 0% | 12% | 2% |
| Z | 0% | 2% | 2% |
Individuals anticipating fewer than 35 years of work will not qualify for the maximum pension benefit without making additional voluntary contributions. Higher payouts may be available for those who opt for voluntary contributions or defer taking their benefit.
History of National Insurance Contributions
British employees contribute to National Insurance from age 16 until the official retirement age—65 for most, increasing to 67. Initiated by the National Insurance Act of 1911, the system provided unemployment benefits.
Initially, health and pension benefits were managed by private trade unions and approved societies. An Old Age Pension was available to those over 70, a significant age given the era’s lower life expectancy.
World War II saw the British government commit to expanding social safety nets. Promised in 1943 by Prime Minister Winston Churchill, the system of ’national compulsory insurance for all classes for all purposes from the cradle to the grave’ was fully implemented in 1948. Its scope extended over the 20th century to include the National Health Service, public pensions, and unemployment benefits.
What Is a National Insurance Number?
A National Insurance number (NIN) is a unique identifier similar to a Social Security number. It ensures record-keeping of contributions against an individual’s name and serves as a reference for social security inquiries.
Does Everyone in the U.K. Make National Insurance Contributions?
Eligible individuals must be 16 or older and meet income thresholds to start making NICs. Employers typically deduct contributions via payroll, while the self-employed must independently manage their contributions. Employers need to report these contributions regularly to HMRC and complete Form P45 upon an employee’s termination.
What Do National Insurance Contributions Fund?
NICs finance a variety of social benefit programs in the UK, including pension systems, unemployment benefits, and sickness benefits, among others.
The Bottom Line
Several countries have systems to fund social benefit programs. The UK’s National Insurance system relies on contributions from employees aged 16 and above to support retiree pensions, unemployment benefits, and other related social programs. Contributions require a valid National Insurance number, and the system is similar to the FICA system in the U.S.
Related Terms: NIC, NIN, National Insurance number, PAYE, FICA, social security, health insurance, pension plan, unemployment benefits
References
- Payroll information to report to HMRC. GOV.UK. https://www.gov.uk/guidance/what-payroll-information-to-report-to-hmrc
- Gov.uk. “Your National Insurance number”.
- Gov.uk. “Overview”.
- Gov.uk. “Voluntary National Insurance”.
- Gov.uk. “The basic State Pension”.
- Gov.uk. “The new State Pension”.
- Gov.uk. “Category letters”.
- SSA.GOV. “UNEMPLOYMENT COMPENSATION”.
- UK Parliament. “Welfare and insurance legislation, 1946-1948”.
