National Insurance

National Insurance, payments made by employers and employees in the United Kingdom to fund state benefits, such as unemployment pay and pensions. The money goes into a separate fund and technically is not part of central government revenue. National insurance has some of the characteristics of a tax, although the payments employers and employees make are referred to as “contributions.” The distinction made by William Beveridge (the national insurance system set up in 1946 implemented proposals of the Beveridge Report) was “that taxation is or should be related to assumed capacity to pay rather than to the value of what the payer may expect to receive, while insurance contributions are or should be related to the value of the benefits and not to the capacity to pay.”

National insurance contributions are based on earnings. The percentage of earnings paid by employees is different from that paid by employers, and that paid by self-employed workers. Those earning below a certain amount do not have to pay any national insurance and those earning more than a certain amount do not pay national insurance on earnings above that amount. In the case of someone earning just under £23,000 (the national insurance ceiling, equivalent to about $36,300 in United States currency), the employee’s total national insurance contribution is currently set at just over £2,000, which is about 9 percent of earnings, and the employer’s contribution is higher (equivalent to slightly more than 10 percent of earnings). However, for those earning up to about £10,660, the employer’s contribution ranges from 3 to 7 percent.

Many countries operate similar systems, in which there is a distinction between taxes that finance such things as public sector wages, and compulsory social insurance that finances welfare benefits.