Part 3: Contribution rates and employer costs

This part of the guide explains the NHS Pension Scheme contribution rates for both members and employers.

In October 2021, proposals were put forward for changes to contribution rates. Following consultation, the changes were implemented from 1 October 2022. The agreed changes are covered here.

Employer contribution

The employer’s contribution to the pension scheme is based on the pensionable pay of the GP or staff member. The larger proportion of the contribution comes from the practice, with top-ups (or refunds) coming from central NHS.

Member contribution

Members pay contributions to the NHS Pension Scheme based on their earnings. A tier system determines the contribution rate. If a member earns more and moves up a tier, their contribution will be based on their whole income, not just the amount that falls into the higher tier.

This is an important point. Going just £1 into the next tier can result in a large rise in the percentage applied across the member’s whole income.

For practice staff, the contribution rate is based on the whole-time equivalent earnings up to 30 September 2022. From 1 October 2022, this is based on actual pay.

For GPs, the contribution rate is based on actual pensionable earnings.

Note, though, that for new GPs joining the 2015 section, and for GP locums, the contribution rate remains based on annualised earnings.

The pension tiers for England and Wales changed on 1 October 2022:

The tier system can lead to some quirks and occasionally an increase in take-home pay can be wiped out by higher pension contributions.

Example 1

Staff Member 1 earns £49,000 and contributes 10% of earnings = £4,900 a year.

Staff Member 2 earns £49,250 and contributes 11.6% of earnings = £5,713 a year.

If Staff Member 1 receives a small pay rise to earn the same amount as Staff Member 2, the extra pay would be £250 a year, but the increase in pension contribution would be £813, leaving Staff Member 1 with lower take-home pay.

For changes in England and Wales from 1 October, the key points are:

1. Contributions will be based on actual pay rather than whole-time equivalents. This will be better for part-time workers.
2. Each year, the tiers will be increased in line with the Agenda for Change pay award to keep pace with pay increases globally.
3. The changes to the tiers will be phased in over two years from 1 October 2022.
4. Over time, the number of tiers will reduce, with the lowest rate being 5.2% up to an income of £13,246, with the highest rate being 12.5% on all income above £56,164. There will be winners and losers, but at the lower end of the scale, members may pay a higher percentage which will not go down well with full-time lower earners.

In Scotland, the current tiers and rates are slightly different and changed on 1 April 2022:

In Northern Ireland, the tiers and rates will change on 1 November 2022 and again in 2023 (date to be confirmed).

From 1 November 2022:

Further changes are planned across England, Wales, Scotland and Northern Ireland in 2023.

Tax relief

The tax relief available through the NHS Pension Scheme makes it a very attractive option for saving for retirement, especially considering employer contributions and the death in service and ill health benefits. (The only possible sting in the tail for higher earners is the pension annual allowance tax charge which will be covered in a later part of this guide.)

Members get tax relief depending on the marginal rate of tax they pay. A basic rate taxpayer would get 20% tax relief and a higher rate taxpayer at least 40%.

Employees, including practice staff and salaried GPs, get their tax relief through the PAYE system so their net pay takes this into account.

Self-employed GPs, including partners and locums, have their tax relief managed through their tax returns.

The employer’s contribution, paid by the practice, also gets tax relief since the expenditure is tax deductible when working out GP practice profits.

Read parts one and two of this useful guide here.