The formal assessment of a pupil's performance made by the teacher at the end of each key stage in most national curriculum subjects is expressed in terms of the level at which the pupil is currently working. Assessment is made against eight levels of attainment. Parents are informed of the level at which their child is working during Key Stages 1–3 through the child's school report. At Key Stage 1 the pupil's level is based on the teacher's assessment. At Key Stages 2 and 3 the level will be based on the pupil's performance in national tests as well as on the teacher's assessment.
http://www.qca.org.uk/eara/70.asp This page explains how teacher assessment operates, using the example of Key Stage 1.