National Insurance sits awkwardly across R03 and R04, which is exactly why it gets skipped. Candidates learn income tax thoroughly, learn the pension allowances thoroughly, and then lose three or four marks on contribution classes and qualifying years. It is a small topic with clear rules and no calculation ambiguity.
The classes
| Class | Who pays | Applies to |
|---|---|---|
| Class 1 primary | Employees | Earnings above the primary threshold |
| Class 1 secondary | Employers | Earnings above the secondary threshold, no upper limit |
| Class 1A | Employers | Most benefits in kind |
| Class 1B | Employers | PAYE settlement agreements |
| Class 2 | Self employed | Treated as paid where profits exceed the small profits threshold |
| Class 3 | Anyone | Voluntary contributions to fill gaps in the record |
| Class 4 | Self employed | Profits between the lower and upper profits limits |
Employee contributions are charged at 8% between the primary threshold and the upper earnings limit, then 2% above it. The self employed pay Class 4 at 6% between the lower and upper profits limits, then 2% above. Employers pay above the secondary threshold with no ceiling, which is why salary sacrifice into a pension is such an efficient planning point.
Three exam facts about who pays nothing:
- Employees over State Pension age pay no Class 1, and the employer still pays secondary contributions
- Under 16s pay no contributions
- Investment income, pensions and rental profits are outside National Insurance entirely, which is the single most tested point in this area
Benefits each class buys
- Class 1 builds entitlement to the State Pension, contribution based employment and support allowance, new style jobseeker allowance, maternity allowance and bereavement support payment
- Class 2 builds State Pension, ESA, maternity allowance and bereavement support, and not jobseeker allowance
- Class 3 builds State Pension and bereavement support only
- Class 4 buys no benefit entitlement at all, which surprises candidates every sitting
The new State Pension
For anyone reaching State Pension age on or after 6 April 2016 the single tier system applies.
| Feature | Detail |
|---|---|
| Full rate 2026/27 | £241.30 a week, around £12,547.60 a year |
| Years for the full amount | 35 qualifying years |
| Minimum years for any pension | 10 qualifying years |
| Uprating | Triple lock, the higher of earnings, prices or 2.5% |
| Taxation | Taxable as non savings income, paid without deduction of tax |
Each qualifying year is worth roughly one thirty fifth of the full rate, so 24 years produces about 69% of the full amount. That single division is the most likely calculation you will meet.
Credits and gaps
National Insurance credits protect the record when contributions are not being paid. The main ones are child benefit claims for a child under 12, carer allowance, statutory sick pay periods, jobseeker allowance and certain training courses. Specified adult childcare credits allow a grandparent providing childcare to receive the credit that the working parent does not need.
Voluntary Class 3 contributions can fill gaps, normally for the previous six tax years. The payback period is short, often around three years of extra pension for the cost of one year of contributions, which makes it a strong recommendation in a case study where a client is short of qualifying years and near State Pension age. Always advise the client to obtain a State Pension forecast before paying, because some years produce no increase.
Deferral
Under the new system, deferring the State Pension increases it by 1% for every nine weeks of deferral, which is about 5.8% for a full year. It can only be taken as extra income, and there is no lump sum option, unlike the pre 2016 rules where deferral offered a lump sum with interest. That contrast is a favourite comparison question.
Contracting out and the starting amount
Anyone with a record spanning 2016 has a foundation amount, which is the higher of what they would have received under the old rules and what they would receive under the new rules based on contributions to that date. Where the old scheme entitlement exceeds the new full rate, the excess is a protected payment paid on top. Where the person was contracted out of the additional state pension, a contracted out pension equivalent deduction reduces the starting amount, which is why many clients with long final salary service are short of the full new State Pension despite having 35 years of contributions.
Pension age and planning points
State Pension age is currently 66, rising to 67 between 2026 and 2028 and legislated to reach 68 thereafter. Case study answers should reference the client actual State Pension age rather than 65, and should treat the State Pension as the secure income layer against which other income needs are measured.
Useful levers to mention:
- Check the forecast and the number of qualifying years before recommending voluntary contributions
- Claim child benefit even where the high income charge applies, electing to receive no payment, to preserve credits
- Consider deferral where the client is still working and would pay higher rate tax on the pension
- Remember the State Pension is paid gross and uses part of the personal allowance
The revision card
Write down the classes and who pays, the two rates for employees and the self employed, the 35 and 10 year rules, the weekly amount, the deferral rate and the three types of income outside National Insurance. That is nine facts, and they are worth several marks across two modules.