The best insurance a nation can hope for?

'The object of government in peace and in war is not the glory of rulers or races, but the happiness of the common man' - William Beveridge, 1942

It's a tax that few understand, yet the amount it pulls in now outstrips even the vast sums paid in VAT. Over the past three decades middle income families have been forced to stump up ever greater payments towards it, and this week the burden went up again. So just what is national insurance?

For most people, it is no more than another layer of income tax.

The chancellor, Gordon Brown, this week added an increase in national insurance of 1% for all workers earning more than £4,615, which will have the same effect as a 1p rise in income tax rates across the board. The move effectively reverses his 1p cut in the standard rate of tax in April 2000 and creates a new top rate of 41%.

A worker with the average UK salary of £21,400 will pay an extra £3.70 a week, or £192.40 a year. Someone with a salary of £32,100 will need to find an extra £5.75 a week or £299 a year. Up the income scale, a worker with an income of £50,000 a year will be £453.85 a year worse off, while their counterpart raking in £100,000 a year will pay an extra £953.85 a year.

John Whiting, tax expert at PricewaterhouseCoopers says national insurance has become an extension of the tax system in recent years to pay for general government expenditure.

"We now have a top tax rate of 41% and another hole in the fiction that national insurance contributions are anything other than a tax," he says.

Guy Smith, of accountants Moore Stephens, adds: "The government has effectively raised the tax burden by adding a 1% NI levy on peoples' incomes."

Readers of Jobs & Money agree. Many of the people quizzed about their views on the Budget (see opposite) said Mr Brown was attempt ing to disguise tax rises using a scheme that few people understood. They argue the government should be more honest and combine the two taxes to show the tax employees pay in total.

The system looks odd when you do. Combine the two taxes and you find that workers will pay 21% of their salary to the exchequer on their first £1,920 of taxable income (10p tax rate plus 11% NI). On the next £28,750, they combine the standard rate of tax at 22% and 11% NI to pay 33% of their income. Then there is a drop down to 23% when they hit the ceiling for the 10% element of NI (£30,940) when they continue paying the new 1% NI levy with the standard rate of income tax.

Taxpayers carry on paying 23% until they reach the top rate of tax, which depends on the level of their personal allowance, currently £4,335. At this point, usually an income level of £34,235, they start paying 40% plus the 1% NI.

Unlike the bulk of employers, which must cough up an extra 1% on employee salaries, workers will see some of their tax rises offset by a raft of new benefits worth £2.8bn.

The benefits will be paid mainly to low and middle income earners in the form of tax credits through the PAYE system. Next year, non-pensioner benefits will come under either the working tax credit or the child tax credit.

Workers earning average incomes will be especially grateful for the tax credits. As the table shows, they have seen the proportion of their income spent on national insurance soar from 5% to 9% while people on twice average earnings have enjoyed paying the lowest rate as a proportion of income.

No wonder national insurance has become the second largest source of government income, bringing in £65bn to the exchequer compared with VAT, which adds £64bn and income tax at £118bn. The extra NI is needed to pay for a health system that is forecast to cost £105bn by 2008.

Despite the widespread depiction of national insurance as just another stealth tax on those in work, NI contributions remain the key to a number of state benefits. The 1942 Beveridge report proposed a comprehensive system of benefits based on an insurance scheme rather than general taxation.

The report's author, William Beveridge, wanted national insurance benefits to be strictly conditional on having paid sufficient contributions. In 1948, the system was introduced when he said it would be "first and foremost a plan of insurance - of giving in return for contributions benefits - as of right and without means test."

From the outset, the government undermined this link, immediately paying pensions without any contributions being paid. And of course today there are few benefits that depend on the amount of money paid into the system and most are means-tested.

But others are based on how much has been paid over shorter periods. What you get may also depend on the type of national insurance paid. There are four different classes - one for those in employment, two for those in self-employment and a fourth "voluntary" stamp. There are also "credits" for those who cannot keep up payments - often those caring for someone.

Those in employment pay class 1 contributions, the key to the widest range of non-means-tested benefits. These include:

· Basic state pension. You need to have paid the equivalent of 52 times the lower earnings level (currently £88.75 a week) in any one tax year before retirement. You also need to have paid the same rate for the requisite number of years during your working life - normally nine years for every decade.

· Bereavement allowance. The conditions are similar to the pension.

· Incapacity benefit. This pays out if you cannot work because of illness or disability. To apply, you must have paid the equivalent of at least 25 payments at the lower earnings level in one of the three last tax years before the "benefit year" in which the claim is made. In addition, you must have paid amounts equal to at least 50 times the lower earnings level over the past two years.

· Jobseeker's allowance. This pays a weekly amount to people who are looking for work. The qualification conditions are broadly similar to those for incapacity benefit, although the 25 times lower level hurdle must generally be crossed in one of the past two contribution years.

· Bereavement payment. A lump sum paid when your spouse dies. Your spouse needs to have paid the equivalent of 25 lower level contributions in any tax year.

The self-employed pay class 2 - a flat £2 a week - which allows a claim on all benefits except jobseeker's allowance.

Class 3 contributions - now £6.85 a week - are voluntary. They are usually paid by people who are overseas or in prison. They only offer state pension and bereavement benefits.

People working for themselves also pay class 4 - currently a 7% deduction on earnings between £4,615 and £30,240 a year. This is pure additional tax, unrelated to benefits.

Aggrieved self-employed workers who resent paying a tax masquerading as a form of insurance will be joined by the rest of the working population if the responses of readers are anything to go by. And the government is now under pressure to admit the basic rate of tax is in fact 33%.