A form of personal taxation
in the United Kingdom
, funding social welfare
such as the National Health Service
, social security
, and the state pension
. It is entirely separate in operation from income tax
, and because it is all for good cause
s, there is often widespread public support for increased
National Insurance when essential services are manifestly underfunded
, which in Britain is more or less all of them all the time.1
Both employees and employers contribute, as a proportion of the employee's NIable income. Most payments to employees are both taxable and NIable, but they don't exactly coincide. There is a Lower Earnings Limit (LEL) and an Upper Earnings Limit (UEL). Employees only contribute up to their UEL, but employers continue to contribute for all earnings beyond that as well.
Formerly both sides of NI contributions (NICs) began to be collected at a very low rate (2%) up to the LEL, then the full rate from the LEL. Then as of 6 April 1999, the up-to-LEL rate was set to zero; and an Employers Earnings Threshold was introduced, between LEL and UEL, and employers only began to contribute from that point on.
On 6 April 2000 an Employees Earnings Threshold was also brought in, between LEL and the employers threshold. This meant no-one contributed from the LEL, only from one of the two thresholds; but the LEL, though no longer appropriately named, still has a use, as will become apparent. As of 6 April 2001 the two thresholds were set to the same point.
The employees and employers sides are also officially known as Primary and Secondary, so you see the terms Primary Contributions, Secondary Threshold, and so on, but in practice they are usually referred to by terms such as EEs and ERs, pronounced as one syllable.
Different classes of employee have different actual rates to pay. This is marked by a letter called the NI Category. "A" is normal, "B" is a reduced rate applicable to some married women and widows2, and "C" is (I think) for retired people such as directors who are still getting income. They pay no NICs but their employer still contributes for them.
As of 6 April 1997... The tax year starts on 6th April because the civil year used to begin on Lady Day, 25th March, and got shifted when the calendar changed by eleven days in 1752... So anyway, as of 6 April 1997 employees who also had private pension schemes could opt out of part of their state pension contributions. Categories "D", "E", and "C" are the respective equivalents of A, B, and C used for people in contracted-out salary-related (COSR) schemes. The re-use of C is very unfortunate because you have to refer to these quite separate categories as C contracted-in and C contracted-out. Categories "F", "G", and "S" are the equivalents for people in contracted-out money purchase (COMP) schemes.
There are also a number of more obscure categories for people like mariners who spend large parts of their working life outside Britain's territorial waters. Finally, NI category "Y" is a completely different kind of thing, relating to vehicle usage and calculated on engine size and type.
Shall I make this more complicated? Oh go on then, why not. With the introduction of thresholds came rebates. Contributions on both sides are further reduced by a small amount equal to the difference between the standard rate and the contracted-out rate. This rebate is applied to the NIable salary between the LEL and the Threshold. For an employee who doesn't earn much more than the Threshold, it is possible that the rebate will entirely cancel out the contributions they owe, so that their net NIC is zero. In this case, if the EEs rebate exceeded the EEs contribution it cancelled, the remainder (only a few pence) is paid to the employer (in addition to their own ERs rebate) for general offset against their total NI bill.
NI is calculated and paid independently each period (week, month or whatever), except for company directors. A director's NI is cumulative. Each period their whole year's NIable earnings are assessed as if they had just received it all in that period. The NI payable is calculated, then the previous period's payment is subtracted. Annual contribution rates are used. This gives a continually updated average assessment. The true amount payable to the Inland Revenue is the final calculated amount at the end of the year. A director is always deemed to be a director from the time they were appointed till the end of the year (5 April), even if they in fact ceased before that. Someone who becomes a director part way through the year is assessed pro rata on an exact 52-week year; so if they are appointed a director in week 7 they pay at 46/52 of the annual rate.
Only one job can be eligible for contracted-out rates. Someone paying as, say, category F in their primary job is rated the equivalent full rate, category A, for other jobs.
Since employees only contribute up to the UEL, if they're contracted-out they and the employer only get the benefit of that up to that point. The employer still pays NICs for any employee earnings above the UEL, but at the full rate, not the contracted-out rate.
In 2002-03 the rates are as follows:
EmployERs contribution (on Threshold onward)
- EmployEEs contribution (on Threshold to UEL)
- Category A: 10%
- Categories C, S: none
- Categories D, F: 8.4%
- Categories B, E, G: 3.85%
EmployEEs rebate (on LEL to Threshold)
EmployERs rebate (on LEL to Threshold)
- Categories A, B, C(in): 11.8%
- Categories D, E, C(out): 8.3% up to UEL, then 11.8% beyond
- Categories F, G, S: 3.5% up to UEL, then 11.8% beyond
- Categories D, E, C(out): 3.5%
- Categories F, G, S: 1%
bands are: LEL £75, Threshold £89, UEL £585.
bands are: LEL £325, Threshold £385, UEL £2535.
bands are: LEL £3900, Threshold £4615, UEL £30420.
NI is linked to individual workers over their working lives by the National Insurance number, which has the general format XX999999X. If an employer doesn't know an employee's NI number when they start, they can assign a temporary number of "TN" + date of birth (ddmmyy) + sex.
1. sql*kitten tells me NI is no longer hypothecated to welfare: it goes into general government funds and they supposedly plough it back into welfare, but it's not guaranteed.
2. Married women were eligible for lower rates up to 11 May 1977. Those who opted for this before that date are still allowed to remain on category B.