2.2.3 National Insurance
A second important deduction from gross income is National Insurance contributions. National Insurance – which was introduced in 1911 and subsequently expanded, especially in the 1940s – is paid by both employees and employers. Historically, it formed the basis for paying social security benefits related to unemployment, illness and retirement.
Government’s tax and National Insurance receipts fund all benefits as well as other public services and state provision. National Insurance contributions from employers and employees make up the second largest single contribution to UK government receipts, at £110 billion in 2014/15 or approximately 21% of all government receipts (HMRC 2016).
The mechanics of collection are that HMRC issues each person in the UK with a National Insurance account number against which contributions are recorded. The level of contributions influences entitlement to, and in some cases the level of, certain benefits. As with Income Tax, the rules and regulations surrounding National Insurance change regularly. In 2016/17 there is a primary threshold of £8060 per year and an ‘upper earnings limit’ of £43,000. On income between these limits, employees’ National Insurance is generally levied at 12%. Any portion of income above the upper earnings limit is subject to only a 2% levy (Gov.UK, 2015).