For many years, we saw no changes in NHS pension contribution rates or pensionable earnings tiers. October 2022 marked the first changes in contribution rates and pensionable earnings tiers since 2015. This was a planned two step approach following earlier consultations.
The Department of Health and Social Care (DoHSC) released another consultation on 26th October 2023, with a further update on 8th November 2023.
Matt Norton, Senior Client Manager, is here to explain what the latest proposed changes are.
Take it away Matt…
On 1st October 2022, the pension contribution rates and pensionable earnings tiers were amended. This saw the lowest pension contribution rate rising from 5% to 5.1% and the lowest contribution rate reducing from 14.5% to 13.5%. The changes generally resulted in lower earners paying more into the pension scheme than they previously paid, with the higher earners paying the same or less into the pension scheme.
The changes also saw the number of pensionable earnings tiers rising from 7 tiers to 11 tiers.
It was also agreed that the pensionable pay tiers would increase each year in line with Agenda for Change pay increases and this has been implemented in the 2023-24 financial year. This was agreed so members of the pension schemes didn’t end up financially worse off for receiving the Agenda for Change pay rises.
The current pensionable pay tiers and rates are as follows for 2023-24:
As stated above however, these are part of a two-stage process to change the pension contribution rates and tiers. The DoHSC have released their consultation with the suggested planned changes.
So, what do we need to know from the consultation document?
The first planned change is in the number of tiers of pensionable earnings and the associated pension contribution rates. The proposed changes from 1st April are as follows:
There has been an increase in the lower earnings pension contribution rates and decrease in the pension contribution rates at higher levels.
A dentist who is predominantly carrying out NHS dentist may see their contribution rate falling from 13.5% to 12.5%. For someone with net pensionable earnings of £75,633 (the minimum pensionable earnings to pay the 13.5% contribution rate in 2023-24), this is a pre-tax saving of £756.33. Dentists earning between £51,709 and £58,92 will see their pension rate fall from 11.6% currently to 10.7% from April 2024.
However, there are increases at other levels. Dentists with net pensionable earnings between £45,997 and £51,708 will see their pension contribution rates rising from 10% to 10.7% (a rise in pre tax contributions of between £321.98 and £361.96). Dentists doing a small amount of NHS work will also likely see a rise in their pension contribution rate with the lower tiers generally moving into a higher pension contribution rate tier.
It is important to remember that the 2015 NHS pension scheme is a Career Average Revalued Earnings (CARE) scheme and so the amount you put into the scheme is not reflected in your pension accrual. Instead, it is your pensionable earnings that dictate how much pension you are accruing and so a rise in pension contributions for the same pensionable pay will not see a rise in pension accrual.
Part of the consultation looks at the first contribution tier. This is set at a rate of 5.2% and is much lower than the other rates. The consultation is looking at removing this rate in the future and aligning it with the higher tier. This removal of the lower tier is due to this tier comprising some pension members earning just above or below the personal allowance and not receiving tax relief on their pension contributions. This puts them worse off than someone on the same earning but paying into a relief at source scheme. With a proposal to pay back any missed tax relief for affected individuals, the consultation is asking whether the lower tier should be removed.
Annual Agenda for Change pay rises or CPI?
The consultation also looks at the pensionable earnings bands and how these should be increased each ear. At the moment, this is set to rise in line with Annual Agenda for Change pay rises, but these are implemented after the start of the tax year and so there are uncertainties at the start of each year on what the actual pension pay tiers will be.
The DoHSC suggest that increasing in line with CPI would be a better solution. The previous September’s CPI rate would be used and so the pensionable pay tiers would be known at the start of each financial year. This offers a neater solution to this issue.
However, although CPI increases would apply, the consultation is also looking to freeze the highest pensionable pay tier to £58,973. This would then see the lower band compress over the next few years and would see more members pay at the higher rate of 12.5% as pay increases.
New employer contribution rate
Although this does not affect dentists and dental practices, the employer pension contribution will increase from 20.6% to 23.7% from 1st April 2024. This follows the results of the 2020 valuation of the scheme which showed an increase in benefit costs and an increase required in the employer contribution rate.
Here to help
The consultation will be closing at 11.59pm on 7th January 2024. If you have any questions regarding your NHS pension or any other financial matter, our dedicated specialist team are here to help. To speak to our team, give us a call on 0151 348 8400.
