National Insurance Contribution (NIC) Overview

What Is a National Insurance Contribution (NIC)?

A national Insurance contribution (NIC) is a tax paid by British employees and employers to fund government benefits programs. Contributions are made through payroll deductions and are based on several criteria, including an employee's age and earnings. Individuals need a National Insurance number issued by the federal government before NICs can be made. The NIC program works just like the Federal Insurance Contributions Act (FICA) system in the U.S.

How National Insurance Contributions (NICs) Work

National Insurance is a tax paid by individuals and corporations in the United Kingdom. It is a withholding tax just like FICA in the United States. Employees and employers pay a share of the National Insurance contributions, which the employer collects through payroll deductions. Self-employed individuals pay both portions. Employers regularly report these contributions to the Her Majesty's Revenue and Customs (HMRC).

In order to begin paying, individuals must have a National Insurance number, which is just like a Social Security number (SSN). Taxpayers can apply for a NIN online. This number is unique to an individual, so contributions are recorded against only one taxpayer's name.

Taxpayers must make NICs as long as they meet the following criteria:

• Are 16 or older
• Earn more than £242 a week or are self-employed with an annual profit of more than £12,570

Employees can also make additional voluntary contributions so they can qualify for a higher pension amount in the future. Self-employed people and British citizens working outside the country can also make voluntary contributions toward pension eligibility.

NICs are collected to fund a number of benefit programs. This is done by dividing employees into classes. The table below highlights these classes and the benefit programs they fund.

Categories and Rates for National Insurance Contributions (NICs)

Employees are divided into different categories:

There are other categories for taxpayers who work in freeports. Individuals who don't make NICs are categorized with the letter X.

Each of these classifications is assigned a different rate based on the amount they earn per week:

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. Payouts may be higher for employees who make voluntary contributions or defer taking the benefit until a later age.

History of National Insurance Contributions (NICs)

British employees pay the National Insurance from age 16 through the official retirement age, which is age 65 for most but is being gradually increased to age 67. The system began with the National Insurance Act of 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. 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.

The Bottom Line

Many countries have systems in place to fund social benefit programs. The National Insurance system in the United Kingdom relies on contributions from employees over the age of 16 to pay for retiree pensions, unemployment benefits, and other related social programs. Individuals must have a valid National Insurance number before contributions can be made. National Insurance contributions are similar to the FICA system in the United States, which funds Social Security and Medicare.