National insurance is the system of payroll taxes, and related social security benefits, that has operated in the United Kingdom since its introduction by the government of Clement Attlee in the late 1940s.
The name national insurance was adopted as an expression of that government's aspiration that the system should be qualitatively different from conventional general taxation such as income tax or consumption taxes.
The proposed differences that were enacted, or aspired to, included:
- tax base - contributions were only levied on income from employment (excluding pensions in payment), and trading profits
- the contributory principle - eligibility to benefits depended on a claimant's contribution record or the contribution record of her husband
- loose hypothecation - the current revenue from national insurance contributions 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
With the introduction of employer payroll tax deduction (Pay-As-You-Earn or PAYE), employees' national insurance contributions were collected along with income tax. This replaced the old system of purchasing a contribution certificate or stamp, but for many years some older Britons continued to describe making NI contributions as paying their stamp.
In the contemporary United Kingdom budget national insurance contributions are a significant source of government revenue comparable with value-added tax (a consumption tax levied on most goods and services at a standard rate of 17.5%).
