national insurance - Introduction, Contribution classes, The National Insurance number, NIRS

A system whereby the state insures all its residents against illness, disability, unemployment, and old age. In the UK, for example, the National Insurance Scheme is funded by compulsory contributions on all workers above a low exemption limit and their employers. The National Insurance Fund then makes payments to individuals who are ill, unemployed, or retired. The contributions cover only a small part of the total cost of the scheme, the remainder coming from central government revenues.

National Insurance is a system of taxes, and related social security benefits, that has operated in the United Kingdom since its introduction in 1911, and wider extension by the government of Clement Attlee in 1946.

Introduction

The name national insurance was adopted as an expression of the government's aspiration that the system should be qualitatively different from conventional general taxation such as income tax.

The proposed differences that were enacted, or aspired to, included:

the revenue was expected to roughly equate to current spending on contributory benefits no means testing of benefits - the amount of benefit paid in respect of any claim by a claimant was the same whether the claimant was rich or poor, depending only on the completeness of the claimant's contribution record a cap on the system's scope for redistribution - above a certain level of earnings or profits no extra contributions were payable the payment of a contribution by an employer for each employee comparable to that paid by the employee

Initially, the most important contributory benefits were the State Retirement Pension and Unemployment Benefit.

With the introduction of employer payroll tax deduction (Pay-As-You-Earn or PAYE), employees' national insurance contributions were collected along with income tax.

In the contemporary United Kingdom budget national insurance contributions are a significant source of government revenue: £90 billion in 2006-2007, approximately 17% of total government receipts.

Contribution classes

National insurance contributions (NICs) fall into a number of classes. Class 1, 2 and 3 NICs paid are credited to an individual's NI account, which determines entitlements to certain benefits - including the state pension. Class 1A, 1B and 4 NIC do not count towards benefit entitlements but must still be paid if due.

Class 1 contributions are paid by employees and their employers. There are three milestone figures which determine the rate of NICs to be paid: Lower Earnings Limit (LEL), Earnings threshold (ET) and Upper Earnings Limit (UEL). Between the ET and the UEL, NICs are paid at a rate of 11% on earnings by employees and 12.8% of earnings by employers. Above the UEL, NICs are paid at a rate of 1% on earnings by employees and 12.8% of earnings by employers.

Class 1A contributions are paid by employers on the value of company cars and other benefits in kind of their employees and directors at rate of 12.8% of the value of the benefits in kind (from their P11Ds).

Class 1B were introduced on 6 April 1999 and are payable whenever an employer enters into a PAYE Settlement Agreement (a PSA) for tax. Class 1B NICs are payable only by employers and payment does not provide any benefit entitlement for individuals.

Class 2 contributions are fixed weekly amounts paid by the self-employed. They are due regardless of trading profits or losses, but people on small (low) earnings can apply for exception from paying and those on high earnings with liability to either Class 1 or 4 can apply for deferment from paying.

Class 3 contributions are voluntary NICs paid by people that wish to fill a gap in their contributions record which has arisen either by not working or by their earnings being too low. The main reason for paying Class 3 NICs is to ensure that a persons contribution record is preserved for entitlement to the state pension,generally a person needs either 10 or 11years for a minimum state pension (depending on sex and date of birth),although in certain cases fewer years may be required.

Class 4 contributions are paid by self-employed people as a portion of their profits, calculated with income tax at the end of the year, based on figures supplied on the SA100 tax return. Above the earnings threshold and below the upper earnings limit class 4 NICs are paid at a rate of 8% of trading profits. Above the upper earnings limit class 4 NICs are paid at a rate of 1% of trading profits.

The National Insurance number

Children born and resident in the UK are assigned an NI number (referred to internally as a NINO), and receive a plastic card of similar proportions to a credit card with the number raised on the front shortly before their 16th birthday, and are advised to keep the card safe (only one replacement card may ever be issued over the lifetime of an individual). However, allocation of this number might occur a long time before this occasion (the date can usually be established from the prefix letters used), and siblings may have consecutive numbers - this is dependent on the payment of Child Benefit.

Persons from abroad looking to work in the UK, or those to whom a number was not initially allocated as children, may apply for a number through the Department for Work and Pensions (DWP).

The format of the number is two letters, six digits, and one optional letter.

In the case of AB 12 34 56 C, the first and second letter cannot be D, F, I, Q, U and V.

To validate a NINO the following regular expression can be used "^[A-CEGHJ-PR-TWZ][A-CEGHJ-NPR-TWZ] ?\d{2} ?\d{2} ?\d{2} ?[ABCD]"

It is worth noting that, while an individual may be issued with a second NI number when all traces of their original number has been lost, these numbers never change.

As Britain does not (yet) have a system of personal ID cards, and not everyone has a passport, the NI number is, along with the NHS number, the only system which provides every adult in the country with a code number.

NIRS

National Insurance contributions for all UK residents and some non-residents are recorded using the NIRS computer software package (National Insurance Recording System, pronounced "nurse").

The original NIRS was a more archaic system first used in 1975 without direct user access to its records.

There has been some controversy regarding the NIRS/2 system from its inception in 1996 when problems with the new system attracted widespread media coverage.