Haris Ashley
National Insurance contributions (NICs) are the UK's second-biggest tax, raising around £145 billion in 2019-20, which represented 17.5% of all tax revenue. NICs are paid by employees, the self-employed, and employers on their earnings. NICs are often thought to be used to pay for the NHS, and while some NICs revenue does go to the NHS, it only makes up a small proportion of NHS funding. The majority of NICs revenue is spent on contributory benefits and the state pension, with the remaining amount paid into the National Insurance Fund (NIF). The NIF is a separate pot of money from the government's main account, reserved exclusively for spending on social security benefits.
| Characteristics | Values |
|---|---|
| What are National Insurance Contributions (NICs) | A direct tax paid by employees, the self-employed, and employers on their earnings. |
| How are NICs collected? | Contributions are collected by HM Revenue and Customs (HMRC) through the PAYE (Pay As You Earn) system, which also includes income tax and student loan repayments. |
| How much revenue do NICs generate? | NICs are the UK's second-biggest tax and are expected to raise around £170 billion in 2024-25, contributing to about 16-18% of total tax revenue. |
| How are NICs classes determined? | The type of NICs paid depends on employment status and income level. There are different classes of NICs, such as Class 1, 2, and 3, each with its own contribution rates and benefit entitlements. |
| Do NICs go towards healthcare? | A portion of NICs revenue (about a fifth) is allocated directly to the National Health Service (NHS). However, this only makes up a small proportion of NHS funding, and the government decides how much to allocate to the NHS each year. |
| What is the National Insurance Fund (NIF)? | The NIF is a separate fund from the government's main account, where most NICs revenue is reserved for spending on social security benefits, such as the State Pension. |
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What You'll Learn
National Insurance contributions are the UK's second-biggest tax
National Insurance contributions (NICs) are the UK's second-biggest tax. They are paid by employees, employers, and the self-employed on their earnings. NICs are levied on the earnings of individuals aged 16 or over, with different classes of contributions depending on factors such as employment status and income level. For employees, NICs are collected through the PAYE (Pay As You Earn) system, along with income tax and other deductions.
The rates of NICs vary depending on factors such as income level and employment status. Up to a certain threshold, earnings are free of NICs. Above this threshold, main rates are payable, with lower rates for employees and the self-employed on earnings above a higher threshold. The rates are set for each tax year by the government and are published by HMRC.
NICs are a significant contributor to UK government revenues, raising £145 billion in 2019-20, which represented 17.5% of all tax revenue. In 2024-25, NICs were expected to raise just under £170 billion, or around a sixth of all tax revenue. NICs are forecast to continue to be a significant source of revenue for the government, with an estimated £200.6 billion expected to be raised in 2025-26, representing 16.3% of all receipts.
While some believe that NICs are ring-fenced to pay for benefits or the National Health Service (NHS), the reality is more complex. While a portion of NICs revenue is allocated to the NHS, it is topped up from general taxation to meet the government's desired spending level. The remaining NICs revenue is paid into the National Insurance Fund.
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NICs are paid by employees, the self-employed, and employers
National Insurance contributions (NICs) are paid by employees, the self-employed, and employers. NICs are the UK's second-biggest tax, expected to raise just under £170 billion in 2024-25, or around a sixth of all tax revenue. They are a significant contributor to UK government revenues, comprising 18% of total revenue in the 2019/2020 financial year.
NICs are levied on the earnings of individuals aged 16 or over. Employees pay Class 1 (primary) NICs on their earnings if they exceed the Lower Earnings Limit (LEL). The LEL is set at £120 per week for 2021/22. A zero rate of NICs is charged on earnings between the LEL and the primary threshold (PT), which was £184 per week in 2021/22. Employees are treated as if they have made a contributory payment, which maintains their entitlement to contributory benefits. Earnings above the PT are charged NICs at a rate of 12%, subject to a cap at the upper earnings limit (UEL), which was £967 per week in 2021/22. Earnings above the UEL are charged NICs at a rate of 2%.
The self-employed pay Class 2 and 4 NICs. As of January 2020, self-employed NICs will be categorised as Class 2 when profits are between £6,365 and £8,631.99 a year. The self-employed face no equivalent to employer NICs. The rate of NICs that the self-employed pay is lower than the rate paid by employees (9% vs 12%). The self-employed will have more scope to deduct work-related expenses from their income.
Employers pay Class 1 (secondary), 1A, and 1B NICs. Employers are responsible for deducting the employee contribution from gross wages, with no action required by the employee. Employers also have incentives to engage self-employed workers, rather than take on employees, due to the absence of employer NICs on the payments they make.
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NICs are paid to qualify for certain benefits and the state pension
National Insurance contributions (NICs) are paid to qualify for certain benefits and the state pension. The benefit component includes several contributory benefits, with the availability and amount determined by the claimant's contribution record and circumstances. Weekly income and some lump-sum benefits are provided for participants upon death, retirement, unemployment, maternity and disability.
Class 1, 2 and 3 NICs paid are credited to an individual's NI account, which determines eligibility for certain benefits, including the state pension. A 'qualifying year' is a year when sufficient NICs have been paid or been treated as having been paid, or where one has received National Insurance credits. A minimum amount of contributions or credits is required for a year to count as a 'qualifying year' towards one's overall contributions record.
To be eligible to claim a state pension when one reaches state pension age, one needs to have enough qualifying years on their National Insurance record. This record is built up from age 16 until one reaches state pension age. The number of qualifying years needed on one's record differs depending on whether one is claiming the new state pension or the basic state pension.
The rates at which an individual and their employer pay contributions depend on a number of factors. Consequently, there are many possible sets of employer/employee contribution rates to account for all combinations of the various factors. Employers are responsible for allocating the correct table letter to each employee depending on their particular circumstances.
Voluntary contributions can be paid to fill any gaps and top up one's State Pension.
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NICs are collected by HM Revenue and Customs (HMRC)
National Insurance contributions (NICs) are collected by HM Revenue and Customs (HMRC), the UK government body responsible for the collection and administration of most taxes. NICs are paid by employees, the self-employed, and employers on the earnings of those they employ. NICs are the UK's second-biggest tax, with forecasts estimating that they will raise £200.6 billion in 2025-26, which equates to around £7000 per household and 6.7% of national income.
For employees, NICs are collected through the Pay As You Earn (PAYE) system, along with income tax, student loan repayments, and any apprenticeship levies that the employer is liable to pay. NICs are only levied on labour income, including the wages and salaries of employees and the earnings of the self-employed. The rates at which individuals and their employers pay contributions depend on several factors, including age and occupation.
The NICs collected by HMRC are paid into the National Insurance Fund (NIF), which is separate from the main government account. The NIF is used exclusively for spending on social security benefits, such as the State Pension, and a small proportion is directed to the National Health Service (NHS). In years when the NIF is insufficient to finance benefits, it is topped up with general taxation revenues, and in years of surplus, it is used to reduce the national debt.
The government decides how much to raise in NICs and how much to allocate to the NHS and contributory benefits. While NICs are often thought to be ring-fenced for the NHS, only a small portion of NICs revenue is allocated directly to the NHS, with the remainder topped up from general taxation.
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NICs are not ring-fenced to pay for the NHS
NICs are not ring-fenced for the NHS, and the money is not used solely for this purpose. NICs are the UK's second-biggest tax, and they form a significant proportion of the UK government's revenue, raising £145 billion in 2019-20, or around 17.5% of all tax revenue. In 2024-25, NICs are expected to raise £170 billion, or around a sixth of all tax revenue. In 2025-26, this figure is forecast to increase to £200.6 billion, or 16.3% of all receipts.
The majority of NICs revenue is spent on contributory benefits, such as the state pension, and only a small amount is directed to the NHS. This allocation is topped up from general taxation to the total amount the government wishes to spend on the NHS. The remaining NICs revenue is paid into the National Insurance Fund (NIF). The NIF is a separate pot of money from the government's main account, and it is used exclusively for spending on social security benefits.
While NICs do contribute to NHS funding, they are not solely designated for this purpose, and the government decides how much to allocate to the NHS from general taxation revenue each year.
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Frequently asked questions
National Insurance contributions (NICs) are the UK's second-biggest tax, paid by employees, the self-employed, and employers on their earnings.
A small amount of NICs revenue is allocated directly to the NHS. However, this only makes up a small proportion of NHS funding.
NICs are paid into the National Insurance Fund (NIF) and are used to pay for the state pension and other contributory benefits. Most of the money raised through NICs is spent on these contributory benefits.
NICs are expected to raise just under £170 billion in 2024-25, with forecasts estimating £200.6 billion in 2025-26.
