National Insurance Contributions (NIC) Overview

National Insurance Contributions (NIC): An Overview

National Insurance Contributions (NIC) are taxes paid by British employees and employers to fund government benefits programs, including state pensions. The contributions are made through payroll deductions.

The NIC deduction works much like the FICA withholding system in the U.S. (FICA stands for Federal Insurance Contributions Act. The funds withheld pay Social Security and Medicare benefits.)

Understanding the NIC

The National Insurance (NI) system was created in 1911 to provide assistance to workers who were sick and unemployed. A series of expansions in the 20th century extended its reach to add funding for the National Health Service, the public retiree pension plan, and unemployment benefits.

British workers pay their share of NI contributions to build up an entitlement over time for later payment of a pension and other government benefits such as a maternity allowance.

In 2020, the rate was 12% of the worker's weekly earnings between the equivalent of about $220 a week and about $1,200, dropping to 2% above that maximum.

Employees can make voluntary additional NI contributions in order to qualify later for a higher pension amount. Self-employed people and British citizens working outside the country also can make voluntary contributions to build towards pension eligibility.

An employee who works or expects to work fewer than 35 years will not qualify for the maximum pension benefit without making additional voluntary payments. The maximum pension benefit in 2020 was about $215 per week. The payout may be higher for employees who make voluntary contributions or defer taking the benefit until a later age.

A Short History of NIC

The current system of National Insurance in the United Kingdom began with the National Insurance Act 1911 and was limited to a government-funded unemployment benefit.

At that time, health insurance and pension benefits were administered by private trade unions and "approved societies," or professional associations. An Old Age Pension was paid to people over age 70, at a time when only one in four Britons lived that long.

World War II was nearing its end by the time the government began contemplating an expansion of the social safety net in Great Britain. In March 1943, Prime Minister Winston Churchill, in a radio broadcast, promised a system of "national compulsory insurance for all classes for all purposes from the cradle to the grave."

The system was not fully in place until 1948. Since then, it has periodically been revised, expanded, and cut back depending on the prevailing political climate.

Today, British employees pay the National Insurance rate from age 16 through the official retirement age, which is age 65 for most but is being gradually increased to age 67.