National Insurance - History

History

The current system of National Insurance has its roots in the National Insurance Act 1911, which introduced the concept of benefits based on contributions paid by employed persons and their employer. The chosen means of recording the contributions required the employer to buy special stamps from a Post Office and affix them to contribution cards. The cards formed proof of entitlement to benefits and were given to the employee when the employment ended, leading to the loss of a job often being referred to as being given your cards, a phrase which endures to this day although the card itself no longer exists.

Initially there were two schemes running alongside each other, one for health and pension insurance benefits (administered by "approved societies" including friendly societies and some trade unions) and the other for unemployment benefit which was administered directly by Government.

After the Second World War, the Attlee government pressed ahead with the introduction of the Welfare State, of which an expanded National Insurance scheme was a major component. As part of this process, responsibility passed in 1948 to the new Ministry of National Insurance. At that point a single stamp was introduced which covered all the benefits of the new Welfare State.

Stamp cards for class 1 (employed) contributions persisted until 1975 when these contributions finally ceased to be flat-rate and became earnings related and were collected along with Income Tax under the PAYE procedures. Older Britons continue to describe making NI contributions as paying their stamp.

As the system developed, the link between individual contributions and benefits was weakened.

The National Insurance Fund is nominally hypothecated, and National Insurance payments cannot be used directly to fund general government spending. However, surplus in the fund is invested in government securities, and so is effectively lent to the government at low rates of interest. National Insurance contributions are paid into the various classes of National Insurance after deduction of monies specifically allocated to the National Health Service (NHS). However a small percentage is transferred from the fund to the NHS from certain of the smaller sub-classes. Thus the NHS is partially funded from NI contributions but not from the NI Fund.

In the early twenty-first century, governments sometimes announced that income tax rates had not increased, while increasing revenue by increasing the rates and scope of NI. The unfairness of a tax that is levied on the wage income of all workers but not on dividend or interest income has also been criticised: a low-paid worker must pay NI on his income, while a wealthy owner of income-bearing assets does not.