MAIN DIFFERENCES BETWEEN NATIONAL INSURANCE
CONTRIBUTIONS (NICs) AND INCOME TAX
|Area of difference
|Who pays||Anyone resident in UK and others with income in UK
||people over 16 and under state pension age working in UK. (Employer still pays NICs when employee is over 60/65)
|Base for charge||Total income including savings and investment income, state/occupational pensions and earnings replacement benefits
||earnings from employment and self employment
|Reliefs and rebates||Wide range of allowances, exemptions and reliefs eg for pension contributions, married couples allowance
Lower NICs rates paid by people contracted out of SERPs
& married women optants
|Period of assessment||PAYE may be deducted each time an employee is paid but final income tax is based on total taxable income from all sources for the tax year
||NICs calculated fully and finally for each pay periodusually a week or a monthon the basis of earnings in that period
|Structure of charge||Charged at graduated rates, without a ceiling on the income charged, on an individual's total income less allowances and reliefs. Each individual is entitled to a personal allowance but other allowances/reliefs mean that individuals' tax thresholds vary
||Employee NICs is charged at 10 per cent on any income between lower earnings limit (LEL)and upper earnings limit (UEL) (Entry fee of 2 per cent charged on earnings up to LEL once this threshold is crossed abolished from 4/99)|
single rate of 12.2 per cent on earnings from LEL (aligned with personal tax allowance from 1/4/99)no UEL
|Basis of deduction from pay||PAYE is deducted on a cumulative basis. Deduction in each pay period takes account of earnings and allowances that have accrued from the start of the year.
||NICs are paid on the basis of earnings in each pay period.
33. For 1999-2000, the single persons tax allowance and
threshold for Employer NICs are aligned at £4,335 a year.
For Employee NICs, the Lower Earnings Limit is £66 and the
Upper Earnings Limit is £500.
34. People who are normally liable for National Insurance
contributions but who are temporarily not working due to a specified
contingency, eg. they are unemployed and available for work or
incapable of work due to sickness, may be eligible for credited
contributions to assist them to maintain their insurance record
during these periods.
35. Credits are not sufficient by themselves to earn
entitlement to social security contributory benefits. It is necessary
for some contributions to have been paid during the relevant tax
years on which a benefit claim is based.
36. A full list of the contingencies for which credits
may be awarded follows:
Starting creditsfor the tax year in which
age 16 is reached and for each of the two following tax years
to the level required to make those years reckonable for pension
Approved trainingfor each week during any
part of which a person was undergoing a course of full-time training
or a course of training introductory to such a course provided
that the course was not intended to continue for more than 12
months. The person must have attained the age of 18. More flexible
conditions apply to disabled people.
Invalid Care Allowance creditsfor each
week in which Invalid Care Allowance is paid or, in the case of
a widow, would have been payable but for the provisions of the
Social Security (Overlapping Benefits) Regulations.
Unemploymentfor each week for the whole
of which a person is in receipt of Jobseeker's Allowance or satisfies
certain conditions set down in Section 1(2) of the Jobseekers
Act 1995. These include that s/he is available for, capable of,
and actively seeking remunerative work. It is also possible to
award unemployment credits, where required, to persons in receipt
of certain compensatory payments following dismissal from employment.
Incapacityfor each week in which each of
the days was a day of incapacity for work within the terms of
the legislation or was a week in which an unemployability supplement
or allowance was payable.
Persons approaching pensionable agefor
the tax year in which a person attains the age of 60 and for each
of the four succeeding years to the level required to make those
years reckonable for contributory benefit purposes.
Jury servicefor each week for any part
of which a person attended at Court for jury service provided
that, if he was employed, his earnings that week were below the
Maternityfor each week during a Maternity
Allowance period for which benefit was paid. Employees in receipt
of Statutory Maternity Pay may apply for credits if they have
a deficient NI record for the contribution year(s) in which SMP
Termination of full-time education, training or
apprenticeshipfor the purposes of entitlement to unemployment
and incapacity benefits onlyfor either one of the last
two complete tax years before the beginning of the relevant benefit
year if during any part of that year, the claimant was undergoing
a course of full-time education, training or other full-time occupational/vocational
course or was an apprentice. The course or apprenticeship must
have terminated at the time the claim was made and must have commenced
before the claimant was 21. More flexible conditions apply to
Termination of Widowed Mother's Allowancefor
the purposes of entitlement to incapacity and unemployment benefits
only, where entitlement to Widowed Mother's Allowance ends (other
than by remarriage or cohabitation), a widow may receive sufficient
credits to enable her to satisfy the second contribution condition
for these benefits.
Family Credit recipientsfor the purposes
of entitlement to a Category A or a Category B Retirement Pension,
a Widowed Mother's Allowance or a Widow's Pension, where Family
Credit is paid for any week in respect of an employed earner or
a self-employed earner who has been excepted from liability to
pay Class 2 contributions on the ground of small earnings, that
person shall be credited with earnings equal to the lower earnings
level in respect of that week. NBthis only applies where
a person attains pension age after 5 April 1999 and in respect
of weeks falling wholly or partly in the 1995-96 and subsequent
tax years. Where a married/unmarried couple are involved, regulations
set out who is entitled to the credit. The total of earnings and
FC counts for SERPS.
Disability Working Allowance Creditsrecipients
of Disability Working Allowance receive Class 1 credits. Total
of earnings + DWA counts for SERPS.
37. Home Responsibilities Protection was introduced as
part of the New Pension Scheme in 1978. It is designed to protect
the basic state Retirement Pension and Widow's Benefit position
of certain categories of men and women who stay at home because
of caring responsibilities. It is also available to those carers
who may do some work but whose earnings are insufficient to achieve
a qualifying year for basic state retirement pension purposes.
A woman who has retained her right to pay reduced rate National
Insurance Contributions is not entitled to Home Responsibilities
38. The working life of an individual is the number of
years from the start of the tax year in which they enter the National
Insurance system (usually the year they reach age 16) to the end
of the tax year before the one in which they reach pensionable
age. The working life of men is usually 49 years and for women
44 years. The working life of the individual is reduced by the
number of years of relevant home responsibilities up to a maximum
of 20 years reduction.
39. In 1978-79 the number of people with National Insurance
Credits recorded was 7.1 million, this rose sharply in the early
eighties and was at a peak of 10.8 million in 1986-87. Since then
the number had fluctuated downwards and then upwards and was 10.0
million in 1995-96. In each year between 1987-88 and 1995-96 over
55 per cent of people with National Insurance Credits recorded
had 52 or more weeks awarded. In most years, 11 per cent to 12
per cent have less than nine weeks awarded.
40. When Home Responsibilities Protection was introduced
in 1978-79 the number of people with Home Responsibilities Protection
recorded was 4.9 million. This decreased to a low of 4.7 million
in 1986-87 and has since increased year on year to 5.3 million
41. There are a number of groups who are treated as exceptions
to the current general rules eg married women/widows with non-paying
elections, voluntary contributors and those receiving autocredits.
42. Married women/widows with non-paying elections.
The married women's non-paying option was introduced in 1948 as
an integral feature of the National Insurance scheme at a time
when very few women worked or earned enough entitlement to their
own pension. With the growth in women working in the 1970s and
the requirement to ensure equal treatment, the married women's
option was withdrawn from April 1977, but those who had already
chosen to pay a reduced rate were allowed to retain the right.
Arrangements were also made to allow a married woman to revoke
her election so she could pay full-rate contributions if she wished.
Taking into account those self-employed women who are not liable
to pay Class 2 NICs and women temporarily between jobs, the total
number of women retaining a valid election was roughly 560,000
in 1995-96. In that
year, some 340,000 married women and widows were paying reduced
Class 1 NICs. Some 160,000 of these were contracted-out. The number
actually paying reduced rate contributions at any given time is
falling sharply: for example by 2003-04 only some 70,000 women
are expected to be still paying reduced rate Class 1 contributions
(although the number retaining a valid election would be higher).
43. There are also those paying voluntary contributions.
Voluntary contributions are helpful to the wider objective of
enabling people to build up pension entitlements.
44. It is impossible to know exactly how many people
will pay Class 3 with respect to the current year. This is because
of the long time laggenerally
up to the end of the sixth year following the year for which the
contributions are paidthat arises in practice between the
year in question and the payment of the contributions.
Assuming that everything else is equal, between 250,000 and 275,000
people will pay Class 3 in respect the current tax year. Fewer
than 100,000, however, are likely to do so before the end of that
tax year, with most paying later (eg, following a NI "Deficiency
Class 3 contributors tend to be in the upper age
ranges, peaking at age 59. There is a sharp drop in the number
of male contributors between ages 60 and 64, due to the availability
of autocredits to that
Some 50,000 people abroad pay Class 3 each year.
It is not possible to tell how many of these are temporarily out
of the country and how many are expatriates living permanently
Mostly contributors opt to pay Class 3 for either
an entire tax year orless usuallyfor just a handful
Current receipts from Class 3 contributions are
estimated at £60 million pa.
45. Since 1983, autocredits have been awarded automatically
to people for the tax year in which they reach age 60 and for
each of the four succeeding tax years to the extent necessary
to make each year a reckonable one for contributory benefits.
This provision was introduced to remove the necessity for the
many men who retired at age 60 to attend the Employment Service
Jobcentre and declare their availability for work when, in practice,
few had any real intention of resuming employment. Autocredits
are not available for any tax year in which the individual is
abroad for more than 182 days. Around 1.3 million people received
autocredits during 1995-96.
46. There are a number of other special groups, including
share fishermen (who pay a higher rate of Class 2 contribution
in return for entitlement to JSA (Contribution-based)); Volunteer
Development Workers overseas (who are eligible to pay voluntary
Class 2 contributions at a reduced rate, in order to retain an
ongoing link with the UK benefit system); and employees who are
responsible for paying their own primary contributions
because no legal liability falls on the employer (eg, locally
recruited staff of foreign embassies).
47. Certain other groups not necessarily treated as exceptions,
but their position is sometimes problematic, and must also be
kept in view. They include actors and musicians, and UK
workers temporarily working abroad (particularly those
covered by the EC Regulations on social security for migrant workers
or reciprocal agreements with non-EC countries).
48. The National Insurance Fund (NIF) is separate from
all other revenue raised via taxation which is payable to the
Consolidated Fund. Revenue from contributions is paid into the
Fund after an allocation to the National Health Service. The NIF
operates on a pay-as-you-go basis, in which current contribution
income finances current outgoings on contributory benefits. It
does not have borrowing powers and thus keeps a safe working balance
of about a sixth of annual benefit expenditure as a protection
against unexpected demands. The National Investments and Loans
Office manage the investment of balances. The responsibility for
policy on the Fund and its control and management was transferred
from the DSS to the Treasury and the Inland Revenue through the
Social Security (Transfer of Functions etc) Act 1999.
49. The National Insurance Fund was established in 1911,
reformed in 1948 and assumed broadly its current form in 1975,
when the separate National Insurance (Industrial Injuries) and
National Insurance (Reserve) Funds were merged with it. From 1948
its income came from three sources
the National Insurance contributions paid by individual
employers' National Insurance contributions;
the state (in the form of the Treasury Supplement,
which accounted for just under a quarter).
50. Over time, the level of the Treasury Supplement was
gradually reduced. It was abolished after 1988-89. Thereafter
the Fund's expenditure was met wholly from workers' and employers'
contributions and a small amount of investment income. This arrangement
did not prove flexible enough to meet unexpected demands and from
1993-94 an Exchequer subsidy for the Fund was therefore established
in the form of the Treasury Grant.
51. The Grant is paid out of the Consolidated Fund into
the National Insurance Fund. The maximum Grant available in any
tax year is set by primary legislation at 17 per cent of the National
Insurance Fund's annual benefit expenditure. The maximum amount
of Grant availablebut not, necessarily, taken upfor
each tax year is set by the annual contributions re-rating order.
52. The amounts of Grant voted in the main Supply Estimates
and paid into the Fund each year are those estimated in the Government
Actuary's report on the annual Social Security benefits up-rating
and National Insurance contributions re-rating Orders. But the
maximum level of Grant which can be made available to the Fund
in a year is prescribed at a prudently higher level (by the contributions
re-rating order). The maximum Grant is set so that, if in that
year the Fund's income from contributions is lower than expected
or its expenditure is higher than forecast, additional amounts
of Grant may be paid into the Fund, subject to Parliament approving
the necessary Supplementary Estimate. This might arise when, for
example, the level of unemployment is markedly higher than expected.
53. The actual amount of Grant drawn by the Fund each
year is usually well below the maximum that may be made available.
For example, the maximum Grant for 1998-99 was set at 2 per cent
of benefit expenditure in that year (£900 million); the actual
Grant required by the Fund for that year was nil. Similarly, the
Government Actuary currently estimates that the Fund will not
need a Grant for 1999-00, although the maximum Grant that may
be made available to the Fund for 1999-00 is again set at 2 per
cent of the estimated benefit expenditure from the Fund in that
year (£930 million).
54. Tables 2.1 and 2.2 show the way National Insurance
benefits have been funded and the share of expenditure met by
the taxpayer. A small proportion of income from contributions
is not paid into the Fund, but to the National Health Service,
meeting between 6 per cent and 17 per cent of NHS costs at various
Additional conditions have to be satisfied for unemployment and
incapacity credits to count for Incapacity Benefit. Back
Additional conditions have to be satisfied for unemployment and
incapacity credits to count for Incapacity Benefit. Back
The last year for which accurate data is available. Back
Students and prisoners, however, may pay Class 3 contributions
for any year which includes a period of at least six months throughout
which the contributor was undergoing full-time education, training
or apprenticeship (where any earnings are below the LEL) or has
been undergoing imprisonment or detention in legal custody, up
to the end of the sixth year following the year in which the education/training
or imprisonment ended. In addition, there is discretion-in respect
of any contributor-to accept voluntary contributions for periods
even further back. Back
For example, voluntary contribution payments for 1998-99 will
still be arriving in 2005. Back
A "Deficiency Notice" is produced some 18 months after
the end of the tax year to notify contributors of any shortfall
in the contribution record and to advise what further action may
be taken, This will include a calculation of the amount of Class
3 payable to make the tax year in question a qualifying year for
RP purposes. Not all contributors, however, receive Deificiency
By virtue of which men may be credited with Class 1 contributions
for the tax year in which they reach age 60 and the four succeeding
years where they have no liability for Class 1 or 2 NICs. Back
It is reasonable to assume that a high proportion of Class 3 payers
age 60 or above live abroad. This is because autocredits are not
available for any tax year where the person is abroad for more
than six months, so this category would have to rely on Class
3 to maintain pension entitlements. Back
For example, out of the 262,600 known to have paid for 1993-94:
116,200 (44 per cent) paid all 52 weeks; 66,600 (26 per cent)
paid for 1-4 weeks and 79,800 (30 per cent) paid for all other
periods. (Of the latter, 19,600 (7 per cent of the total) paid
for between 5-8 weeks.) Back