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ACCA Strategic Professional · Advanced Taxation (UK) · National insurance contributions for employed and self-employed persons

Mia, a sole trader, has tax-adjusted trading profits of £62,270 for 2025/26. Her accountant suggests a personal pension contribution to reduce her tax. What is the effect of a personal pension contribution on her Class 4 NIC?

A personal pension contribution does not reduce Mia's Class 4 NIC. Class 4 is based on trading profits, and pension relief is given against income tax rather than as a deduction from those profits. Her Class 4 remains £2,502.

  1. ANo reduction, because Class 4 is based on trading profits, which are not reduced by personal pension contributionsCorrect
  2. BReduction at 2% of the contribution
  3. CReduction at 6% of the contribution
  4. DReduction at 8% of the contribution

Explanation

Class 4 is computed on trading profits. A personal pension contribution is not a trading expense and gives relief against income tax by extending the basic rate band, so it does not change Class 4. Her Class 4 is £2,262 + 2% x £12,000 = £2,502.

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