UK Financial Services, regulations and ethics

National Insurance contributions (NICs) are paid from age 16 until State Retirement age (SRA). Individuals become entitled to State pension and some other State benefits through accumulation of qualifying years of NICs.

Classes of  NICs

Class 1 contributions are paid by employees (known as primary contributions) and by employers (known as secondary contributions).

Class 2 contributions can be paid paid by the self-employed on a voluntary basis if business profits are below the small profits threshold (£7,105 in tax year 2026/27). If profits are more than the small profits threshold the individual’s NIC record is credited, without the need to pay Class 2 NICs

Class 3 NICs can be paid on a voluntary basis, to fill gaps in a person’s NIC record

Class 4 are paid by the self-employed w...

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...to make up for missed contributions in previous years. They allow an individual to achieve a higher level of new State pension (or basic State pension if they had reached SPA before 6 April 2016). The rate is 2026/27 is £18.40 per week. They must usually be paid within six years of the tax year in which the contribution shortfall occurred and before State Pension Age is reached. 

Class 4 contributions Class 4 NICs are also paid by the self-employed who have profits in excess of an annual lower limit, the lower profits limit, which in 2026/27 is £12,570. Profits between £12,570 and £50,270 are charged at 6% and profits in excess of £50,270 are charged at 2%.

Which class of NICs are paid by the self-employed to entitle them to State pension?

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Different rules apply depending on whether someone reaches State pension age (SPA) before or after 6 April 2016.

The State Pension Age (SPA) is the earliest age that the State pension can be received. The SPA for men and women is currently in the process of increasing from 66 to 67, a process that will be complete by April2028.

The State pension is received by anyone reaching SPA age on or after 6 April 2016, and the full amount is £241.30 per week (£12,547 per year) in 2026/27.

Individuals who had already reached SPA before 6 April 2016 are unaffected by the introduction of the new State pension.

For those reaching SPA after the new State pension was implemented, it completely replaces the previous system of State pensions including the basic State pension, State second pension (S2P) and the savings credit element of the State Pension Credit, with the level of pension being  above that of the guarantee element of pension credit....

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...ase in line with the ‘triple lock’ guarantee that also applies to the basic State pension, i.e. it will increase each April at a rate based on whichever is the highest of earnings growth (as measured by average weekly earnings), price inflation (as measured by the consumer prices index (CPI)) or 2.5%. (The change in earnings is measured over twelve months ending in the previous July and the change in prices is measured over twelve months ending in the previous September).

Where the individual’s starting amount is higher than the full new State pension, it cannot be increased by building up any further qualifying years’ of NICs, but will be increased each year in line with the triple lock guarantee. The protected payment (the difference between the starting amount and the full new State pension) will increase each April in line with CPI.

State how the new State pension increases in payment.

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In November 2018 the SPA for women was equalised with men at age 65. SPA was increased to 66 from October 2020 and is currently in the process of increasing to age 67, by April 2028.

When will the State pension age increase to 67?

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For those that reached SPA before 6 April 2016 they may be entitled to receive Additional State Pension such as:

State Graduated Pension Scheme

The State Graduated Pension Scheme (SGPS) was the first State scheme designed to provide an additional earnings-related state pension to supplement the basic State pension, and entitlement to it was built up between April 1961 and April 1975.

S...

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...d, payments may commence.

Over State Pension age: The amount that can be inherited depends on the spouse or civil partner’s date of birth. The amount received is up to 50% for State Second Pension and between 50% and 100% for SERPS depending on the date of birth of the deceased.

How much S2P can be inherited by a surviving spouse/civil partner?

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This is a means-tested benefit to give individuals and couples a minimum level of income in their retirement. There are two parts: the Guarantee Credit and the Savings Credit.

The savings credit was withdrawn with the introduction of the new State pension, though it remains available to some individuals who reache...

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...e an income of £1 a week for each £500 of savings (rounded up to the nearest £500).

Ben has savings of £16,000 held in a deposit account. In calculating Ben’s eligibility for Pension Credit, how much income will these savings be deemed to provide?

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In the previous sections, we examined the products available to meet the range of financial needs that an individual may have. In some instances, we highlighted how the sums assured or the benefits payable would take into account any State benefits that the individual may also be entitled to. In this section, we will examine the main State benefits available, including how they are funded, who they are available to and how the amounts available to different individuals are calculated.

State benefits are funded through the National Insurance Contributions (NICs) paid by the employed, self-employed and employers; they are effectively a further tax. They are not paid by individuals under the age of 16, even though they may be working and have earnings, nor are they paid by those over State pension age. However, if an individual over State retirement age is still working, their employer will have to continue making contributions.

NICs are paid to His Majesty’s Revenue and Customs (HMRC) and these are then passed on to the Department of Work and Pensions (DWP), who administer all State benefits.

The range of State benefits available is extensive and in this section we will examine only the most commonly claimed benefits. Unless otherwise stated, entitlement to the full amount of any particular State benefit may be reduced if the claimant is also receiving other State benefits.

Some State benefits are contributory, only paid to claimants who have paid sufficient National Insurance Contributions (NIC) to qualify, while others are paid on the basis of a person’s needs and circumstances, regardless of the their NIC contribution record (non-contributory). Some benefits are means-tested on income and others means-tested on the amount of savings or capital an individual may have. Some benefits are taxable while other benefits are not.

These factors can have a significant influence on the level of private provisions needed when undertaking any financial planning advice, so we will also highlight the factors that need to be considered.

You can see the current rates for these benefits on the DWP website www.gov.uk.

The Benefit Cap

The Benefit Cap is a ‘cap’ has been placed on the total amount of benefit that working-age people can receive (16 to State Pension Age). This cap aims to ensure that households where no one is in employment do not receive more in benefits than the average earnings of working households.

The cap applies to the total amount of benefits a household can receive from:

Bereavement Allowance

Child Benefit

Employment and Support Allowance

Housing Benefit

Incapacity Benefit

Income Support

Jobseeker’s Allowance

Maternity Allowance

Severe Disablement Allowance

Universal Credit

Widowed Parent’s Allowance or Pension

The level of the cap is:

£423.46 per week for single parents whose children live with them (£486.98 in London)

£283.71 per week for single adults with no children or whose children do not live with them (£326.29 in London)

The cap does not apply to tho...

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...king after a person with significant care needs who is receiving:

PIP (daily living component)

Disability Living Allowance (at the middle or highest care rate)

Attendance Allowance

Constant Attendance Allowance (at or above the normal maximum rate with an Industrial Injuries Disablement Benefit or basic (full day) rate with a War Disablement Pension

Armed Forces Independence Payment

Child Disability Payment (at the middle or highest care rate), or

Adult Disability Payment (daily living component)

The claimant must not have weekly earnings above a stated level or be in full-time education.

Other benefits

Bereavement support payment

A spouse or civil partner (or partner of someone they were living with as if married) will receive a tax-free lump sum of £3,500 (£2,500 if not in receipt of child benefit or pregnant at the time of their spouse’s death) on the death of their spouse if the deceased had made sufficient NICs, or their death was caused by their employment. This is followed by 18 monthly payments of £350 (£100 if not in receipt of child benefit or pregnant at the time of their spouse’s death). The recipient of the payment must be under State pension age or not entitled to a State pension at the date of their spouse’s death, and the claim must be made within three months of the death of the husband, wife or civil partner if the full amount is to be paid. The payment is not means-tested.

Cold Weather Payment

This is paid to people who are in receipt of other benefits and who need help with heating expenses during Winter months. £25 is paid for each seven-day period of very cold weather between 1 November and 31 March and if the average temperature is recorded or forecast to be freezing (0 degrees) or below) for seven consecutive days.

Funeral payments

Payments can be received by those on low incomes to assist with the costs of family funerals, repayable from the deceased’s estate.

Winter fuel payment

This annual payment of between £200 and £300 is made to those living in England or Wales born on or before a specified qualifying date (which varies each year)  with amounts varying depending on the individual circumstances. Purpose is to help with heating costs. Those with income above £35,000 will have the payment claimed back, by adjustment to their tax code or by making a payment through self-assessment.

Points to consider for financial planning

When considering a client’s financial requirements and the type of products that match the client’s needs, it is vital that the adviser takes into account which State benefits they are entitled to (if any).

It may be that some clients will believe that the State will fully provide for them and their family should they be unable to work, retire or ultimately die. An important part of the advice process is to highlight the actual level of State benefit entitlement.

List the State benefits available to those unable to work through illness or disability.

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