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.
RELATED TERMS
  1. Matching Contribution

    A matching contribution is a type of contribution an employer ...
  2. Savings Incentive Match Plan For ...

    A Savings Incentive Match Plan For Employees Of Small Employers ...
  3. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  4. Unit Benefit Formula

    Unit benefit formula is a method of calculating an employer's ...
  5. Additional Voluntary Contribution ...

    An additional voluntary contribution is an extra allocation of ...
  6. 457 Plan

    457 plan refers to a non-qualified, tax-advantaged deferred compensation ...
Related Articles
  1. Retirement

    401(k) Contribution Limits in 2017-18

    Find out what the contribution limits are for 401(k) retirement savings plans in 2017-18, including individual, employer and aggregate limits.
  2. Retirement

    How Can You Make the Most of Your 401(k)?

    Make the most of your 401(k) plan by contributing early and taking advantage of employer matches.
  3. Retirement

    Thrift Savings Plan Helps Federal Workers Retire

    The TSP is key component of retirement savings for U.S. government workers and members of uniformed services.
  4. Retirement

    Work in the Gig Economy? Don't Miss Out on Retirement Savings

    Here are 5 smart ways the self-employed can save for retirement. Don't miss out – and get financial advice before picking a strategy.
  5. Retirement

    SIMPLE IRA Tutorial

    This comprehensive guide goes through what a SIMPLE IRA is: how to set one up, contribute to it and withdraw from it.
  6. Retirement

    5 Companies With the Best Retirement Plans

    Ever wonder how your company retirement plan stacks up against the country's best employers? Take a peek at these great retirement plans.
RELATED FAQS
  1. How do I report Simple IRA contributions on a W2?

    Learn how Savings Incentive Match for Employees, or SIMPLE IRA, contributions are reported for the participant on Form W2 ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center