Key points
Our guidance covers the local options employers can put in place which may support staff who are concerned about pension tax issues to continue to work in the NHS for longer, and ensure they feel valued, rewarded and appreciated for the work they do.
These local measures would be complementary or in addition to national contracts and the pension scheme regulations and may be suitable for individuals wishing to remain in the scheme as well as those who decide to opt out.
Employers may wish to take appropriate advice and have assurance that such arrangements are lawful and based on strong justifications.
Any local agreements should be reviewed regularly to ensure that they remain relevant and in the best interests of both employers and employees.
Introduction
Staff who have concerns about pension tax charges may feel they need to take action to limit their pension growth. Examples of the actions that staff may consider include:
- reducing working hours
- avoiding any additional paid responsibilities
- opting out of the scheme, either permanently or temporarily for part of the tax year
- taking their pension and leaving NHS employment
- retiring and returning to work, often with lower working hours.
Many of these actions will lead to a reduction in clinical capacity and will have an impact on service delivery.
Experienced senior clinicians and managers are more likely to earn pension benefits that may exceed the annual allowance. Retention of these members of our workforce is key to addressing pressures on service delivery.
Our guidance covers the local options employers can put in place to support staff who are facing pension tax issues. The following arrangements may help support staff to continue to work in the NHS for longer and ensure they feel valued, rewarded and appreciated for the work they do:
Paying unused employer contributions as additional salary (recycling contributions)
We explore the legal risks employers should consider when deciding whether to introduce a recycling policy and the actions employers can take to mitigate some of those risks.
Using multiple contracts of employment
We consider how establishing multiple part-time contracts of employment in place of a single full-time contract of employment can enable employees to opt out of the NHS Pension Scheme for one or more of their employments to reduce the value of pension benefits they build up over the year.
Managing pensionable pay
We outline the existing flexibilities which may allow employers to determine certain elements of pay as being non-pensionable to help staff to limit their pension growth.
Opting out of the scheme for part of the year
We highlight the points employers should consider where employees choose to manage their pension growth by opting out of the NHS Pension Scheme for a period of time during the scheme year.
The importance of financial advice and guidance
Before putting any of these local arrangements in place, employers should strongly encourage employees who are concerned about their pension tax position to seek independent financial advice to:
- check the employee is actually at risk of exceeding their annual allowance
- understand if it is in the employee’s best financial interests to take any action to limit their pension growth.
It is vital that employees take independent financial advice before making any decisions to change their working patterns or opt out of the NHS Pension Scheme.
In some cases, it may be financially beneficial for individuals to continue to work and build up pension in the scheme and pay any tax charge that falls due.
Options such as carry forward or scheme pays may be appropriate ways for the individual to manage and pay their tax liability.
An individual’s pension tax position depends on their own financial circumstances, such as their length of membership in the NHS Pension Scheme, their pay progression, their taxable income from all sources (including income from employment outside the NHS and rental properties) and their pension savings from all employments. This means the most appropriate course of action for one employee is not necessarily the same for another.
A list of organisations that can give expert guidance and advice on pension tax issues for members of the NHS Pension Scheme is available on our website.
Paying unused employer contributions as additional salary (recycling contributions)
Where employees have opted out of the NHS Pension Scheme for tax reasons, employers may introduce a policy to pay any unused employer contributions as additional salary. This is often known as recycling contributions.
As the lifetime allowance (LTA) was removed with effect from the 2023/24 tax year, LTA only recycling schemes no longer have a purpose. Annual allowance (AA) was also increased from £40,000 to £60,000 with effect from the 2023/24 tax year, effectively reducing the number of staff who will be affected. Staff who may still be affected or be affected by the tapered annual allowance my benefit from targeted support. To learn more about changes to pension tax, read our briefing, what the Spring 2023 budget means for pension tax and retention.
The NHS Pension Scheme is a key part of the reward offer for employees in the NHS. Recycling unused employer contributions may be considered necessary to recognise the fact that staff who have opted out of the scheme due to pension tax issues will not get the full value of benefits from their employer’s pension contribution in comparison to other colleagues. These payments are one way to restructure the employee’s total reward package in order to maintain its value. Such a policy could help protect the delivery of services by encouraging employees to continue working in the NHS for longer.
Employers are under no obligation to offer unused employer contributions as additional salary. It is the employer’s decision whether or not to implement a contribution recycling policy, based on the needs of their organisation.
Legal risks for employers to consider
There are some legal risks that employers should consider when deciding whether or not to introduce a recycling policy. This section explains the actions employers can take to mitigate some of these risks.
Key points for employers to include when creating a policy
Employers that have decided to offer recycling of unused contributions should have a policy in place for this. This section covers the points employers should include when developing a local policy. We would encourage employers to seek input from local staff side representatives as part of this process.
- The justification for introducing the policy should be clearly set out. This may help to manage potential equality risks.
- The policy should explicitly state that the arrangement does not form any contractual entitlement and the employer has the discretion to review, amend or remove the policy at any time through consultation and using appropriate notice periods.
- There should be a statement to confirm that the employer has strongly encouraged employees to take independent financial advice to assess if opting out of the NHS Pension Scheme is in their best financial interests.
Employers may wish to signpost staff to our list of independent financial advisors.
- The policy should highlight the impact of opting out of the scheme on the employee’s entitlement to death in service and ill-health retirement benefits.
If an employee dies or retires due to ill health whilst not actively contributing to the scheme, a lower level of benefits is payable. This is outlined in our briefing document and further information is available on the NHS Pensions website. Individuals may wish to consider setting up alternative insurance cover away from the NHS Pension Scheme.
- Employers will need to decide locally which members of staff will be eligible to receive the additional salary payments. The policy should clearly set out how employees will need to satisfy their employer that they are eligible to receive the additional payments. For example, they may be required to provide evidence that they are affected or are likely to be affected by the annual allowance and that they have opted out of the scheme. This could be in the form of a letter from the employee’s independent financial adviser or a statement from NHS Pensions. Employees would need to give their employer sufficient notice if they decided to opt back in to the NHS Pension Scheme, meaning they were no longer eligible for the additional payment.
Employers will need to consider the position of staff who opted out of the NHS Pension Scheme due to tax reasons before the policy was introduced and how they intend to respond to any claims for retrospective or backdated payments.
- The policy should include details of the alternative pension scheme offered to staff. Offering an alternative scheme helps to mitigate the risks of breaching automatic enrolment legislation and offers increased flexibility to the individual over their future pension saving
- Employers will need to clarify the value of additional salary payments available to eligible staff under the policy.
The employer contribution rate increased in April 2024 from 20.6 per cent to 23.7 per cent of pensionable pay (plus the 0.08 per cent scheme administration levy). The government agreed to provide funding for employers to cover this increase in cost. An interim funding arrangement is currently in place under which the employer pays 14.38 per cent to the NHS Pension Scheme and the additional 9.4 per cent is paid directly to the scheme centrally. Employers do not currently have access to this additional 9.4 per cent of contributions. If employers offer to pay employer contributions above 14.38 per cent to staff as salary, this will represent a cost pressure to employers whilst this interim funding arrangement is in place.
The payment of additional salary in lieu of scheme membership will lead to an increase in the cost of the employer National Insurance contributions (NICs) payable in respect of the individual. From 1 April 2022, this increase is approximately equal to 15.05 per cent of the value of any additional salary payments and should be taken into consideration when calculating the amount paid to an employee in order to keep this cost-neutral. The table below shows how employers can pay up to 14.38 per cent of an individual’s pensionable pay to staff as additional salary on a roughly cost-neutral basis, taking into account the increase in employer NICs.
Employers should review the level of payments provided to staff at least annually, to take into account any future changes to the employer contribution rate, National Insurance rates and funding arrangements.
| Member of the NHS Pension Scheme | Employee who has opted out and is receiving employer contributions as additional salary payments.
| |
|---|---|---|
| Pensionable earnings | £100,000 | £100,000 |
| Amount paid to NHS Pensions from the employer (14.38%) | £14,380 | £0 |
| Additional employer NICs* (from 1 April 2022) | £0 | £1,881 |
| Extra taxable amount paid to employee in lieu of pension | £0 | £12,499 |
| Total employer cost | £114,380 | £114,380 |
*In this simplified example, the increase in employer NICs has been calculated based on a flat rate of 15.05 per cent. In reality, employer NICs are only payable in respect of earnings above the secondary threshold and so the correct value of the employer NICs would be slightly lower than shown in the example. Please see the HMRC website for more information.
- Staff will need to make a request under the policy to receive the additional payment. This process should be set out in the policy, having been approved by the board of directors and overseen by the remuneration committee.
- Employers should review the policy regularly and monitor uptake to ensure that it still meets the needs of the organisation.
Using multiple contracts of employment
Employees with multiple part-time contracts of employment can opt out of the NHS Pension Scheme for one or more of their employments to reduce the value of pension benefits built up over the year. For full-time employees, employers have the option to split the full-time contract into two part-time contracts.
The distribution of pensionable and non-pensionable pay across both contracts can be varied to manage pension growth. Both the ESR payroll system and the scheme regulations are already set up to deal with employees with multiple part-time employments.
Unlike the approach of opting out of the scheme for part of the year, this option has the advantage of retaining the death in service and ill-health retirement cover provided by the NHS Pension Scheme for the whole scheme year, as the employee will still be a member of the scheme in at least one of their contracts. However, any benefits would be at a lower level, based on the part-time salary.
Key considerations for employers
Managing pensionable pay
Determining certain elements of pay as being non-pensionable may help staff to limit the value and rate of their pension growth. Individuals with lower pensionable pay will build up a lower pension and will be less likely to breach the annual allowance.
Employers have some flexibility in determining what pay is pensionable, depending on the nature and duration of the payment.
Employers must comply with the NHS Pension Scheme regulations that define pensionable earnings.
- For staff employed by NHS organisations, pensionable earnings are broadly all salary, wages, fees and other regular payments.
- Non-pensionable payments include bonuses, non-regular payments, payments made to cover expenses or overtime and pay awards or increases which are expressed by the Secretary of State to be non-consolidated.
Further information about which payments are pensionable and non-pensionable is available on the NHS Pensions website.
Potential flexibilities in determining pensionable pay
Employers may wish to discuss the existing flexibilities around the following payments:
Key considerations for employers
Pension tax matters are very specific to the varying circumstances of each individual and the nature of the payment. We would therefore encourage employers to discuss pensionable pay arrangements with staff individually to reach an appropriate agreement. Any measures that are put in place should be reviewed regularly to ensure the arrangements remain appropriate for the individual and the employer. We would advise that employers set a review date when agreements are made.
Opting out of the scheme for part of the year
Some employees are choosing to manage their pension growth by opting out of the NHS Pension Scheme for a period of time during the scheme year and then returning to the scheme.
Key considerations for employers
Time off in lieu (TOIL) arrangements
This option does not directly increase the available capacity for service delivery and so it’s effectiveness may be limited during periods of prolonged workforce pressures. However, in certain circumstances, this option may help employers redistribute capacity over the year to ease pressures on service during busy periods.
Employers may offer staff TOIL instead of pay to reduce pensionable income and therefore pension growth. Reducing overall income could particularly help staff who are potentially affected by the annual allowance taper.
