This note gives an introduction to National Insurance system, and the debate there has been about integrating National Insurance contributions (NICs) with income tax.Jump to full report >>
National Insurance contributions – NICs, for short – are paid by employees, employers and the self-employed, and are used to fund contributory benefits: the state pension, contributions-based jobseeker’s allowance, contributory employment and support allowance, maternity allowance, and bereavement benefits. In turn entitlement to contributory benefits is based on someone’s National Insurance payment record. Receipts from NICs go into the National Insurance Fund, which operates on a ‘pay as you go’ basis: broadly speaking, this year’s contributions pay for this year’s benefits. A fixed proportion of NI receipts are not paid into the Fund but go to the National Health Service.
The first part of this paper gives an introduction to National Insurance system: the base and rate structure of NICs, the operation of the NI Fund, and the connection between a person’s contributions into the Fund with their entitlement to receive benefits paid out of the Fund – the ‘contributory principle’ as it is known.
The second part of this paper looks at the major reforms made to NICs since the late 1990s, and in particular, the consideration by successive governments of the case for merging NICs with income tax. It has been argued that despite the operation of the NI Fund, and the contributory link between payments made and benefits received, this charge is no different in kind to other national taxes, and that fully integrating NICs with income tax would be fairer, simpler and more efficient. The issue has been considered, off and on, for almost twenty years, and even though there have been a number of changes to bring NICs and income tax into closer alignment, there remain considerable difficulties to a full-scale merger.