The National Insurance Fund (NIF) accounts for the year to 31 March 2017 have been published.
National Insurance Contributions (NIC) in the main go into the NIF and are then immediately paid out to today’s pensioners. The system is “pay as you go”: today’s contributors pay for today’s pensioners.
Some NIC payments go direct to the National Health Service (NHS) and in 2016-17 this amounted to £23.4bn with the remainder of £95.8bn going in to the NIF. The majority of the receipts of the NIF came from Class 1 contributions which were £92.1bn. The majority of payments out of the NIF are in state pensions, £91.7bn.
The NIF aims to have a couple of months’ worth of contributions in hand as it does not have any powers to borrow and needs to have a bit of a cash reserve.
Should NIC be merged with income tax?
For many people NICs are a tax in all but name and there are endless calls to merge the two. Politically that would be very challenging as it would enormously increase the basic rate of income tax.
ICAEW Tax Faculty published a report in August 2015 weighing up the pros and cons of merging income tax and NICs and last year published a further report Hard choices for national insurance - where are we now?
Overview of NIC
In July 2017 the House of Commons Library published a paper National Insurance Contributions (NICs): an introduction which explains the NIC system and the NIF and also has a chapter exploring the arguments for merging income tax and NIC.