Introduction to Income Tax and NICs National Insurance contributions
National Insurance contributions
4.1
What are National Insurance contributions?
National Insurance (NI) is a system of taxation that is related to certain social security benefits, such as the Basic State pension. It was first introduced by the National Insurance Act 1911 . The ‘tax’ is National Insurance contributions (NICs). The NICs collected are paid into the National Insurance Fund out of which benefits such as the Basic State Pension are paid. A small part of the Fund is used to pay for the National Health Service. The social security benefits are usually referred to as ‘contributory benefits’. These are ones where the claimant’s prev ious contribution record determines the availability and amount of the benefit paid. They are usually paid on a weekly basis to participants upon death, retirement, unemployment, maternity and disability.
4.2
National Insurance number
Although the National Insurance number (NINO) does not affect how NICs are calculated NICs, it is important to the Department for Work and Pensions (DWP),HM Revenue & Customs (HMRC) and to employers because it helps identify the employee and the allocation of certain data from various reports.
4.2.1 NI Recording System
National Insurance numbers (NINOs) are issued automatically to every UK young person on the child benefit register, shortly before the age of sixteen. This represents the ‘opening of an account’ on the National Insurance and PAYE Service (NPS), which is maintained by HMRC. That account will hold the individual’s lifelong National Insurance re cord. All the NICs that will be deducted from the individual’s pay will be allocated to their account (as well as NIC credits for periods when the individual is not earning, in certain circumstances). Similarly, all the contributory social security benefits, including State Pension, that the individual will ever claim will be based upon their account. The NINO is the one essential piece of information that uniquely identifies the correct unique NI record whenever NICs are added to the account or benefits are claimed.
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