What are National Insurance Contributions (NIC)
National Insurance Contributions are payments made by employees and employers into the United Kingdom's National Insurance (NI). National Insurance contributions initially funded programs for the ill and unemployed, and later on eventually paid for state pensions, too. Contributions fall into categories which can either count toward an individual's eligibility for benefits or are paid without counting towards any type of entitlement depending on the category it falls under.
BREAKING DOWN National Insurance Contributions (NIC)
National insurance contributions are made through payroll and income taxes. Over the years, contributions expanded to cover other government-provided benefits. Limits on contributions were removed from upper income levels, making this a more redistributive program.
History of National Insurance Contributions
The current system of National Insurance in the United Kingdom started with the National Insurance Act 1911. It introduced the concept of benefits, based on contributions paid by employed persons and their employer. As a means of recording contributions, employers were required to buy special stamps from the 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. As such, the loss of a job in the UK came to be known 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 benefits, which was administered directly by government. The Beveridge Report in 1942 proposed expansion and unification of the welfare state under a scheme of what was called social insurance. In March 1943 Winston Churchill in a broadcast entitled "After the War" committed the government to a system of "national compulsory insurance for all classes for all purposes from the cradle to the grave."
National Insurance Contribution Classes
National insurance contributions fall into three 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.
- Class 1 contributions are paid by employers and their employees. In law, the employee contribution is referred to as the 'primary' contribution and the employer contribution as the 'secondary', but they are usually referred to simply as 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 total to HMRC along with income tax.
- Class 2 contributions are fixed weekly amounts paid by the self-employed. 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 Class 1 or 4 can apply for deferment from paying.
- Class 3 contributions are voluntary NICs paid by people wishing to fill a gap in their contributions record which has arisen either by not working or by their earnings being too low.
- Class 4 contributions are paid by self-employed people as a portion of their profits. The amount due is calculated with income tax at the end of the year, based on figures supplied on the SA100 tax return.