4 Understanding National Insurance contributions
The second important deduction from gross income is National Insurance contributions (NICs). National Insurance is paid by employees and employers. Historically, it formed the basis for paying social security benefits related to unemployment, illness and retirement. It was first introduced in 1911 and gradually expanded, especially in the 1940s.
NICs from employers and employees make up the second largest single contribution to UK government receipts, at £124 billion in 2016/17 or approximately 22% of all government receipts (ONS, 2017).
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 2017/18 there was a primary threshold of £8164 per year and an ‘upper earnings limit’ of £45,032. On income between these limits, employees’ National Insurance was generally levied at 12%. Any portion of income above the upper earnings limit was subject to only a 2% levy.
Have a go at using what you’ve learned about Income Tax and NICs by trying some calculations for yourself.
Activity 3 Calculating tax and National Insurance
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