David Lloyd George's Liberal government introduced unemployment insurance through the National Insurance Act of 1911. The provisions covered 2.5 million workers, mostly in manual trades. Workers, employers and the Treasury contributed to an unemployment fund. The maximum amount payable was seven shillings a week, which was intended only as a supplement to other sources of income. The period for which insurance could be drawn was limited to one fifth of the period of contributions. The unemployed who did not qualify for insurance had recourse to the Poor Law authorities.
This scheme was inadequate to provide for the large-scale unemployment that followed the end of the First World War. A temporary scheme of unemployment relief, the 'Out of Work Donation', was used to relieve unemployment immediately after the war. This enabled a much larger payment of 29 shillings a week for men and 24 shillings for women, with additional allowances for dependents, to most adults who registered as unemployed. This was available for a strictly limited period, but the government was forced to grant extensions as servicemen were demobilised.
The 'Out of Work Donation' created expectations for the Unemployment Insurance Act of 1920, the details of which were decided in November 1919. The Act extended the provision of the 1911 Act to most workers earning less than £250 per annum. The period in which money could be claimed was limited to one sixth of the period of contribution and the maximum period of claims was 15 weeks. There was little opposition to the end of the Out of Work Donation, because unemployment had fallen to a low level.
The position changed radically early in 1921 and by the middle of the year unemployment, exacerbated by the coal strike, was close to 20 per cent. Under these conditions, the contributory system and the one in six rule were untenable given the threat of political instability and unrest among the unemployed. The Unemployment Insurance Act of March 1921 relaxed the 'one in six' rule by providing for the payment of 'uncovenanted' benefit without previous contributions. The intention was that it could be drawn for a maximum of 32 weeks. The 1921 Act also introduced a 'seeking work' test for those claiming benefit. Claimants had to show that they were genuinely seeking work and were obliged to accept any work paying a fair wage
In February 1922, a means test was introduced as a further means of restricting benefit payments. Uncovenanted benefit was now payable at ministerial discretion, and some groups, such as single adults living with relatives, could be excluded unless it would cause serious hardship.