Taken from /u/pflurklurk’s post here: https://www.reddit.com/r/UKPersonalFinance/comments/82gu9b/understanding_national_insurance/dv9zpyr/
Essentially, National Insurance was enacted in 1911 to provide workers with a system of insurance against illness and unemployment and developed from there. Since workers were generally paid weekly, you had a contributions card that was literally stamped, to show you paid it for any particular week.
After the Second World War, the Welfare State was established – which piggybacked on National Insurance.
Sidestepping the politics of it all, the primary enactments relating to National Insurance are:
- the Social Security Contributions and Benefits Act 1992,
- the Social Security Administration Act 1992, and,
- The Social Security (Contributions) Regulations 2001
All have been amended countless times.
Part XII of SSAA 1992 provided that the National Insurance Fund continues to be maintained by the Secretary of State, but – note, not the Lords Commissioners of Her Majesty’s Treasury, but since 2005, that was transferred to the Commissioners for Her Majesty’s Revenue and Customs.
Part I of the SSCBA 1992 lays out the classes and rates of contributions.
Part XII of SSAA 1992 also provides that part of the money that is paid towards the NIF
What is the NIF though? For that you have to understand how government finance works, conceptually.
There are three main funds:
- the Consolidated Fund
- the National Insurance Fund
- the National Loans Fund
The Consolidated Fund is the fund, that, daily, all government receipts must be paid into – that means tax, fees levied by the Home Office, licence fee money, student loan repayments, DVLA fees, etc. etc.
That fund is in the care of the Commissioners for the Reduction of the National Debt – operationally, now essentially a department of the Treasury.
The account was called “the Account of Her Majesty’s Exchequer” at the Bank of England, although in reality, there are lots of accounts used for government cash-flow purposes.
For any money to be paid out of the Consolidated Fund, requires Parliamentary approval – for which this country fought civil war over.
That occurs in the form of annual Appropriation Acts – such as, Supply and Appropriation (Main Estimates) Act 2017.
However, absent from those Acts are money that goes into, e.g. the DWP to pay benefits specifed from the SSCBA 1992.
That is because the Act (and the SSAA 1992) prescribes those benefits – contributory or non-contributory (such as statutory redundancy payments that are claimed from the NIF instead of insolvent employers), that are to come out of the National Insurance Fund.
It also prescribes that costs in administration of the NIF are to come out of voted funds – i.e. the Consolidated Fund.
That is, the Commissioners are required by primary legislation to keep NICs separate from other taxes and pay it into a separate fund which they control – that is the NIF.
If the NIF runs out of money, it has recourse to the Consolidated Fund as per s.165 (and vice-versa).
As for the NHS funding by National Insurance, that is done by s.162 of SSAA 1992:
162.—(1)Contributions received by the [2Inland Revenue] […3] shall be paid by [2them] into the National Insurance Fund after deducting […4], the appropriate national health service allocation […4].
9) From the national health service allocation in respect of contributions of any class there shall be deducted such amount as the [7Inland Revenue] estimate to be the portion of the total expenses incurred by [7them] or any other government department in collecting contributions of that class which is fairly attributable to that allocation, and [7the remainder shall be paid the Inland Revenue to the Secretary of State towards] the cost–
(a) of the national health service in England;
(b) of that service in Wales; and
(c) of that service in Scotland, in such shares as the Treasury may determine.
So, by law – i.e. with no requirement of getting a vote in Parliament, or the order of the Treasury, the Commissioners must pay directly to the Secretary of State (there is only one office of “Secretary of State”, but there are many “principal Secretaries of State”) that allocation as may be prescribed by the Treasury.
In reality, this is paid directly to the Department of Health and Social Care – so their funding is partly from funds voted by Parliament and partly by primary legislation. In an insane case where Parliament refuses to fund the DHSC, they’d still have money from NICs.
As to what happens to NIF money – that is simply entrusted to the CRND, i.e. the DMO, to be invested: then Chancellor George Osborne decreed that all public sector accounts must be pooled and given to Treasury control to reduce borrowing costs, even though legally they may be in the care of another body.
That is pretty much a basic idea of the operations of NIC – different classes of NICs give different benefit entitlements, and qualifying amounts etc. are quite complicated.
If you have any further questions about it, ask away.