How an NHS car lease may impact your pension

At first glance, a car lease through NHS Fleet Services can look like an attractive offer.  As an NHS professional, you will get a high-end car with low-end fees, and if it’s electric, a low benefit in kind as well. 

Is leasing a car through NHS fleet services a good idea?Sounds good – how does it work?

The car lease is facilitated via a salary sacrifice system, whereby you agree to exchange part of your salary to gain additional non-cash benefits from your employer.  This will lower your salary and reduce tax and national insurance. Your pension is correlated to your income so you can see the relationship. Your car lease can potentially impact your pension annual allowance and this varies depending on which scheme you are in.  When you come to draw your NHS pension your car lease history can have a lasting impact if you are not careful.

Let’s look at an NHS car lease example…

Dr Jones has a pensionable salary of £110,000 and has leased a car via NHS Fleet Services, thus reducing the doctor’s income to £100,000.  Dr Jones is aged 57 in 2020 and has 25 years of service and is looking to retire at age 60.

If Dr Jones is in or has service in the 1995 NHS pension scheme the benefits are based on the best of the last three years of pensionable service (calc1*).  The annual pension would reduce by circa £3,125.  It also means that Dr Jones would in effect be paying for a car for the rest of his/her life.  This could also reduce any spouse’s benefits after death.  The £3,125 would also have been inflation-linked.  If you compound this over twenty years it can bring a tear to the eye.

For the 1995 section of the NHS pension scheme, it is the 3 years before your intended retirement age that is important when considering the salary sacrifice route for car leasing. So avoiding the car scheme in the last few years may be prudent.

The 2008 NHS pension scheme benefits are based on the best average three in the last 10 years.  It may seem a little easier to avoid as we are taking into account 10 years. However, Dr Jones will need to factor in pay grades. Few consultants reach the top of the pay grade in their early fifties, so the best three years are more likely to be closer to retirement.

The 2015 pension scheme is a career average, so a lower income each year will cause a lower career average.

Calc3*** The amount Dr Jones will accrue in his/her pension would be reduced by £742 per annum at aged 60 in this example, after the abatements for drawing early.   

Can it get worse?

The immediate sting is the annual allowance.  

The annual allowance will increase when the doctor sees a pay increase in excess of inflation.  In the case of salary sacrifice, it is not a pay increase, merely returning to the doctors’ previous pay.  The point at which Dr Jones returns the car is the trigger for the annual allowance.  

The impact will vary depending on the scheme or schemes.  

1995 pension scheme

In the example above an increase in £10,000 superannuated pay with 25 years of service would be calculated as follows when Dr Jones hands the car back;

Calc 1* 25/80th * £10,000 = £3125.  

The growth is calculated by multiplying this figure by 19 (16* pension + lump sum).  This would equate to £59,375.  Assuming Dr Jones has not suffered any tapering of £40,000 annual allowance but used all previous years’ allowance, the doctor would have a tax liability as if he/she has earned an additional £19,375.  If Dr Jones has additional service to be included then it will exacerbate the issue, and it gets a lot worse if it’s the year the doctor moves up a pay grade!

Are you still determined to lease a car?

So, if you are still determined to use NHS Fleet Services you need to plan when you are finishing the scheme.

2008 pension scheme

The 2008 scheme is the best of the average of the last three in ten years, so this sudden regaining of the “old “ salary is averaged over the last three years, but it’s still more generous.

Calc 2 ** 25/60th * £10,000 = £4167.    

Based on the calculations it leads to an increase of £66,677. It is only multiplied by 16 as there is no automatic tax-free cash.  

2015 pensions scheme

You need to factor in the “true” cost when looking at the leasing scheme as it’s not as straightforward as you may have initially thought.  We are not saying that it should never be considered but it takes planning.  It is a serious commitment, so should be given due consideration.  The month you take it out can have an impact –  if it’s halfway through a tax year it can spread the annual allowance hike over two tax years.

For those of you who have your own company, you may wish to speak to your accountant about using your company for your next car! 

NB: The estimates we have used are assuming a worst-case scenario with no available annual allowance in previous years.  There are several variables such as inflation, and rates of pay. Legislative factors that could influence the outcome  

Calc 1* £100,000/80 *25 = £31250   £110,000 /80 = £34375  difference is £3125
Calc 2** £100,000 /60 *25 =£41,666 and £110,000 is £45833 difference is £4167pa
Calc 3*** £100,000 /54 = £1851  £110,000 is £2037 difference is £186

This example was for illustrative purposes only. As always we would recommend that you seek full advice from your adviser based on your circumstances before making any decision. 

Has leasing your car through the NHS affected your pension? Let us know by leaving a comment below.


6 thoughts on “How an NHS car lease may impact your pension

  1. Nick Black

    I’ve been in the NHS for 29 years (23 years 1995 scheme, 6 years 2015 scheme), and after getting a large tax bill due to exceeding the annual allowance (for a few years) took out a salary sacrifice car (knowing I was going to get a large increment) to avoid a subsequent one. The McCloud judgement came out and I believe that will reset previous years as my growth in the 1995 scheme will be much lower – so my previous tax liabilities will have gone (is this right?). The annual allowance pressure will restart when the 2022 scheme kicks in. I now am top of scale (so only expecting inflationary rises), have a £800pm salary sacrifice that runs until Oct 2023 (intentionally mid year to split the pay increase). So I think I will be ok for 2022/23, but what is the best approach to exiting the scheme in 2023 and avoiding a Annual Allowance tax bill?

    1. Owen Beswick

      Hi there

      Elements of what you say are correct, but don’t forget to factor in inflation, for instance, which can have a huge effect (good or bad) on the size of inputs. An increment will result in a spike in your ’95 scheme input, so you could potentially “reduce” your superannuable pay by effecting a car lease scheme. However, the downside is that the larger superannuated figure might not be reflected in your pension. So, in avoiding an annual allowance charge, you miss out on additional pension, unless the larger superannuable salary is one of the best of your last three years before retirement. However, for this to be the case, you may well have incurred a larger annual allowance!

      Annual allowance pressures will start again in 2022, but assuming that you only have inflationary increases in pay and you are at the top of your scale, then the 95 scheme deferred pension won’t show large inputs year on year.

      As for exiting the scheme – that is a question as much about annual allowance, resulting pension, and future aspiration! All of these things need to be taken into account. Paying an annual allowance charge of £10k-£20k may seem like good value if it meant that your pension was significantly more!

      Your question is complex and you obviously have a good understanding, but I would encourage you to have a meeting with an adviser to discuss things in more detail.

      Feel free to get in touch.

      Best wishes, Owen

  2. T bulloch

    Hi, I’m working in the nhs 26 year’s service and have been in the 1995 scheme reverting to the 2008 scheme which finished in 2022. I now pay into the last scheme, is my older pension scheme locked so therefore safe from being reduced if I take a salary sacrifice car for three years? I’m still approx 9 years away from retirement.

    1. Owen Beswick

      Hi there

      Please see the link – it takes you through an example of how the car lease scheme will affect your pension. The 1995 scheme is a final salary scheme regardless of the fact that you are not contributing to it, so your pension from it – is based on your highest salary that could be and probably will be, in the next nine years of service.

      I hope this helps.

      Best wishes, Owen

  3. Hilary Williams

    Hi. Only part of my salary contributes to my pension as above 10 SPA is not pensionable . Does this still mean taking nhs car lease would affect pension – thanks

    1. Owen Beswick

      Hi there,

      It’s not possible to effectively for the lease payment to be taken out of the non-pensionable part of your pension.  Basically, salary sacrifice is taken as a deduction from your gross salary which includes pensionable and non-pensionable income.  There is a link here to an excellent article from Octopus Energy(!!) relating to company car schemes. How does salary sacrifice impact pensions? | Octopus EV

      I hope this helps to clarify.

      Best wishes, Owen


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