National Insurance contributions fund state pensions and the NHS.
This doesn’t give the whole picture. Revenue from NICs is notionally separate from other tax revenue and for the purposes of the NHS, state pensions and other social security. But general tax revenue is also used to pay for these things, and a reduction in the money raised through NICs wouldn’t necessarily require a reduction in the amount spent on the NHS, pensions and other benefits.
During Prime Minister’s Questions this week, the Labour leader Sir Keir Starmer asked the Prime Minister about the government’s long-term plans for further National Insurance reductions, saying: “80% of National Insurance is spent on social security and pensions; 20% is spent on the NHS. He is either cutting pensions or the NHS, or he will have to raise other taxes or borrowing.”
A similar claim was made by shadow chancellor Rachel Reeves, who posted on X (formerly Twitter) that “National Insurance Contributions fund state pensions and the NHS”, and then asked: “So will the Prime Minister’s £46 billion of unfunded tax cuts come from cutting state pensions or cuts to our NHS?”
These claims have been challenged by government ministers, including the chancellor Jeremy Hunt who in a response to Ms Reeves’ post said she was “scaremongering” and added: “The value of NICs receipts do not determine the NHS budget or the value of pensions.” Meanwhile home secretary James Cleverly posted: “Nation Insurance Contributions [sic] is a non-hypothecated tax on work. It is not earmarked for state pensions or the NHS.”
Labour’s claims don’t give the full picture about National Insurance contributions (NICs).
It is correct that money raised through NICs is notionally separate from other tax revenue. But that doesn’t mean that the amount the government raises through NICs determines the amount of money spent on the NHS or social security (benefits and pensions).
And it’s not the case that reducing National Insurance would necessarily mean the government would either have to cut pensions or the NHS or raise other taxes or borrowing.
Whether NICs are “hypothecated” (that is, reserved for a specific purpose) or “earmarked” is not a straightforward question to answer, because there may be different understandings of those terms. However, the Institute for Fiscal Studies (IFS) told Full Fact that while “there is a notional allocation of NICs revenue to the NI Fund and the NHS” there is “no real sense in which NICs revenue is hypothecated to specific spending”.
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NICs are collected by His Majesty’s Revenue and Customs. A portion of this revenue is paid directly to the NHS, with the remainder paid into the National Insurance Fund (NIF).
The NHS allocation is determined according to a formula set out in the Social Security Administration Act 1992. In 2022/23, the allocation was £41.8 billion (approximately 24% of total National Insurance contributions that year).
In 2022/23 £129 billion in NICs was paid into the NIF. This fund is formally separate to the Consolidated Fund (the government’s general bank account).
The government currently aims to maintain the NIF at a minimum working balance of 16.7% of annual benefit expenditure. In 2022/23 this was estimated to be £19.4 billion. The balance of the NIF at 31 March 2023 was £72.7 billion and it was above the estimated minimum requirement throughout the financial year.
The government states that: “Receipts paid into the NIF are kept separate from all other revenue raised by national taxes and are used to pay social security benefits such as contributory benefits and the State Pension.”
Crucially though, the level of the NIF does not determine the amount spent on social security payments. Nor does the amount of NICs paid to the NHS determine the level of funding for health services.
The IFS says: “Notionally, the NI Fund is financially separate from other parts of government and is used to fund contributory benefits. In reality, however, this separation is illusory.”“The government decides how much to raise in NICs, and how much to spend on the NHS and on contributory benefits; the amounts need not be related to each other, and generally aren’t.”
The remainder of NHS spending not covered by the NICs’ NHS allocation (that is, the majority of NHS spending) is paid for by revenue from general taxation.
If in some years the NIF doesn’t fully cover social security spending, revenue from general taxation is paid into the fund to make up the gap. Conversely, when the NIF has more money than is required for benefits payments, that money is then invested in the UK’s national debt (effectively reducing the government’s debt).
Put simply, some money that flows into the NIF may not come from NICs, while some money that flows out may not go to pensions or social security benefits.
According to the IFS: “This makes the separation of the NI Fund from the main government account more or less meaningless.”
So while revenue from NICs is notionally set aside from other tax revenue for the purposes of NHS and social security spending, a reduction in the amount of money the government raises through National Insurance wouldn’t necessarily require a reduction in the amount of money spent on the NHS, benefits and pensions.
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