National insurance deductions are a predetermined amount of government benefit program taxes that reduce an employee's take-home income. In some countries these benefit programs provide income to citizens who cannot work due to disability, unforeseen unemployment, age, or an extended illness. These deductions are usually collected by an individual's employer and the amount is figured as a percentage of the person's annual pre-tax income. Depending upon the country that the employee works in, the percentage may be flat or may vary according to income tiers and brackets.
Many industrialized countries have governments that administer benefit programs funded by revenue from national insurance deductions. These deductions are mandatory for all employed citizens who make a certain amount of income per year. For example, in the United States, Social Security provides supplemental income once a citizen reaches a specific age, becomes disabled, or is recognized as a dependent of a Social Security recipient. National unemployment insurance coverage may be provided through these types of payroll taxes in some countries, such as the United Kingdom.
Private and public employers may be required to deduct certain government taxes, depending upon the country's national tax laws. National insurance deductions are usually collected by employers, who deduct the amounts from their employees' weekly, bi-weekly, or monthly incomes. For instance, if the national insurance deduction is set at 10 percent regardless of an individual's income, the person's check is reduced by that amount. The 10 percent tax is distributed to the government and the employee receives a credit towards potential benefit claims.
National insurance deductions can be thought of as a collective tax or pool of money. Each working member of society pays into the system and then receives payments from it when he is no longer able to work. When an individual claims national insurance benefits, the amount that he receives is often identical to his average contribution amount. For example, in the United States a retiree's monthly income from Social Security is usually a percentage of his average lifetime earnings.
Self-employed individuals are also responsible for paying national insurance deductions on their gross income. While the required amount will vary depending upon the individual's national tax law, some countries allow a citizen to take half of his required contributions as a tax deduction at the end of the year. For example, if a self-employed worker is required to contribute 15 percent of his earnings towards national insurance, then 7.5 percent would count towards a reduction in income tax.