Pay Rise Tax Implications

When is a pay rise an unwelcome tax burden?

Some of those most likely to be adversely affected by the government's recent pension legislation are junior doctors or dentists moving up to consultancy, partnership or principal positions.

Consultants may also be at risk if they have recent awards such as clinical excellence. It could potentially mean a hefty tax bill based on your pension.

Following a period of consultation, the government has now made decisions on pension legislation that will take effect from the 6th April 2011 but will have an immediate effect on financial planning and advice. This article focuses on two of the key areas of the government's proposals which are due to come into force next year. 

Level of contribution

As of the 6th April 2011, you can only contribute a total of £50,000 per annum into your pension. Now whilst most of you will be thinking that would be nice but I am not even close to that....think again.

They do not look at your physical contributions but something that is defined as your ‘relevant benefit accrual’. This in essence looks at how much your pension benefits have risen in the previous tax year.

We have estimated that someone moving from a SPR or GP registrar position to a consultancy/salaried GP role or partnership could have relevant benefit accrual of between £70,000 and £90,000. Equally, a consultant moving through a pay grade, inflationary increase (you’re safe for a year or two!) and clinical excellence awards could find themselves breaching this annual allowance.

The government has put in place some provisions to allow for these spikes in benefit increase. These will allow you to go back and use unused relief in previous years. If you still breach these allowances, then you could find yourself liable to an unwelcome tax bill.

The good news, particularly for high earners, is that you can use this new legislation to your benefit. If you’re a higher rate tax payer, instead of paying 50% income tax now, you can make contributions into a pension environment and, in effect, defer your tax liabilities to a point when hopefully you are in a lower tax bracket.

Lifetime allowance

The government’s restriction on how much you can hold in a pension environment is due to be lowered from £1.8 million to £1.5 million. As a general rule, you would have to have a very high superannuated income to fall into this bracket (depending upon any other provision that you have).

It is good planning to, every few years, evaluate how you are measured against this if you suspect you may be close to the allowance. For those who are close to it already or have breached the allowance, new transitional arrangements are to be announced next year.

We should point out that this is our understanding of the government’s intentions at this point in time. There may be changes in the next few months and we look to keep you informed as ever.

What next?

For further information on the new pension legislation and how it may affect you, contact an L&M financial adviser.

Alternatively, register to attend one of our forthcoming free NHS Pension Options & New Pension Legislation Explained seminars being held in November and December by emailing  This e-mail address is being protected from spambots. You need JavaScript enabled to view it or calling 02031 671607.

We also run group seminars in departments on request, held at a time to suit you and your colleagues. To arrange a seminar for your department, practice or a group of colleagues (at no cost), request a group seminar, email This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call 02031 671607.