Salary sacrifice arrangements for consultants

Salary sacrifice arrangements for consultants

Hospital consultants often ask us about pension matters. One question we’re frequently asked is about the impact salary sacrifice arrangements for a car have on pension benefits and growth.  

Ultimately, a salary sacrifice arrangement for a car reduces your pensionable pay. In the year you start the salary sacrifice, your pensionable pay is likely to go down compared with the year before, and vice versa when the arrangement ends.

Pensionable pay

If you were/are in the 1995 pension scheme, the pensionable pay used for pension growth purposes, is the best of the last three years. So, for a period of time, the pensionable pay used is at the rate before the salary sacrifice started.

If you’re in the 2008 scheme, this is based on the average of the best three consecutive years out of the last ten. So again, for a period of time, the pensionable pay used would be based on your pensionable pay before you entered into the salary sacrifice arrangement.

In the 2015 scheme, this is based on your actual pensionable pay in the year, so your growth will be based on your lower salary sacrificed pensionable pay. 

Pension benefits

As the 2015 scheme is a career average earnings scheme, ultimately the lower pensionable pay will mean that you will accrue lower pension benefits in the 2015 scheme than you would have done without the salary sacrifice arrangement.

The 1995/2008 schemes are final salary linked. If you finish the salary sacrifice before you take your pension, your pensionable pay will increase back up to a higher level, which your pension benefits then will be based on. For the 2008 scheme, you may need to finish the arrangement more than three years before you retire to get the highest final salary link.  

Pension growth

When you finish the lease, your pensionable pay will go back up, causing a jump in pensionable pay and therefore growth, especially in the 1995/2008 schemes which retain the final salary link. If the lease is only for a couple of years, the pensionable pay used for the 1995/2008 scheme could be the best of the last three years. So, in the year you finish the lease and your pay goes back up, the jump may not be as great. However, most leases tend to last for three or four years.

Your pension growth each year is compared with your available annual allowance. If your taxable income is below £200,000, your annual allowance will be £40,000. If your taxable income is above £200,000, your annual allowance could be tapered down to a minimum of £4,000, depending on what your threshold income is. Your annual allowance is used to offset your pension growth and any excess is subject to tax at your relevant rate of tax, after any unused allowances from the prior three years have been used.

Although a salary sacrifice reduces pensionable pay, the value of the salary sacrifice arrangement is added back, for the purpose of threshold income, when looking at whether your annual allowance is tapered.

For more information about this or any other NHS Pension Scheme or tax issue, please get in touch with your usual Larking Gowen contact. You can find contact details on the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk. 

Jamie Butcher