NHS Pay Awards 2025–26: Pension and Tax implications

With the latest NHS pay awards now confirmed, it’s a good time to review how these changes could affect both your pension contributions and overall tax planning as medical professionals.

Whether you’re contributing to the 2015 career average revalued earnings (CARE) scheme or have legacy benefits in the 1995 or 2008 sections, understanding the implications is key to optimising your retirement strategy and managing potential tax liabilities. From annual allowance limits to shifting income tax brackets and new opportunities for salary sacrifice, it’s time to reassess your approach to managing your finances.

Understanding the impact on NHS pensions

If you’re a doctor or dentist working within the NHS, the recent pay increase will likely boost your pension over time; however, the effect depends on which pension scheme you have benefits in:

1995 section final salary scheme members

For those still in the legacy 1995 section, a higher salary now could translate into a larger final salary figure, which is used to calculate your eventual pension, as your 1995 pension benefits will still be based on your final salary. That means greater benefits upon retirement. Don’t forget there is a taxable pension and tax-free lump sum (up to certain limits) available in this section of the NHSPS. 

2008 scheme – Best of three years

For members with service in the 2008 section, your pension is calculated based on the average of your best three consecutive years of pensionable pay in the final 10 years of service. This will be directly meaningful for members with service in this section.

2015 ‘CARE’ scheme members

If you’re in the newer Career Average Revalued Earnings (CARE) scheme, your pension grows annually based on your average superannuated salary. With a higher income, your pension accrual increases as well, but due to the increase in average earnings, this has a lesser impact, although it is still noteworthy and needs to be taken into account. 

Annual allowance considerations

A higher salary means you’ll be contributing more to your pension, and that brings the annual allowance into play.

• The standard annual allowance is £60,000. If your pension ‘growth’ (not your contributions) goes over this, you could face a tax charge.
• High earners should be especially cautious of the tapered annual allowance, which can reduce your limit to as low as £10,000 depending on your income.
• If you’re getting close to or exceeding these thresholds, it’s important to explore ways to manage or mitigate potential tax charges.

Lifetime allowance abolition – what it means now

While the abolition of the lifetime allowance (LTA) in April 2024 was welcomed by many, it hasn’t completely removed tax implications for large pensions.

• A higher pensionable (superannuable) income can lead to a larger NHS pension, especially for members of the 1995 and 2008 sections. The 2015 section sees a smaller impact due to its career average earnings structure. In many cases, this increase in pension also results in a higher retirement lump sum.

For example, under the 1995 scheme, the lump sum is automatically calculated as three times the annual pension.

However, it’s important to be aware of the limits on tax-free lump sums. For most individuals without pension protection, the maximum tax-free lump sum across all pension schemes is currently £268,275. Any lump sum above this amount may be subject to tax.

• The £268,275 limit on tax-free lump sums applies to the total across all your pension schemes, not individually to each one.
• While it’s possible to give up part of your annual pension in exchange for a larger lump sum at retirement, you must be aware that any amount above the tax-free limit may be subject to tax.
• It’s important to understand the difference between the ‘maximum lump sum’ and the ‘maximum tax-free lump sum’. When applying to take your NHS retirement benefits the option to take the maximum lump sum on the AW8 NHS pension scheme (NHSPS) retirement form doesn’t necessarily mean the entire amount will be tax-free.

We strongly recommend seeking independent financial advice before making this decision to ensure you fully understand the tax implications and choose the option that’s right for your circumstances.

Tax planning for higher earnings

With a larger salary, you’ll want to make sure your tax position is just as healthy as your pay packet. A few areas to think about:

Income tax brackets tax year 2025/26: Your pay increase could move you into a higher tax band, possibly even the 45% additional rate.

Salary Sacrifice Schemes: Entering a salary sacrifice arrangement, such as an NHS car lease, can reduce your taxable income and, in some cases, your pension input, which may help lower your exposure to the annual allowance.

However, when the salary sacrifice ends, your income may appear to increase suddenly. This can result in a significant jump in your pension growth for that year, potentially pushing you over the annual allowance and triggering an unexpected tax charge. For more clarification on this, please read our article: How an NHS car lease may impact your pension >

It’s important to plan ahead and seek financial advice to avoid any surprises when these arrangements come to an end.

Investment income: If you earn income from property or investments, you must take this into account and add it to your new salary and any other income. 

Check your Personal Savings Allowance. The limit is £1,000 for basic-rate, £500 for higher-rate taxpayers, and £0 for additional-rate income taxpayers. Go over it, and you may owe more tax.

Final thoughts…

As with most things in life, there are pros and cons. While a pay rise is certainly welcome, especially given how hard-won recent NHS increases have been, it also brings new financial considerations.

With careful and informed planning, the increase in income can significantly strengthen your overall financial position. The key is to stay in control of your finances and ensure that your tax and pension implications are fully understood.

We recommend seeking specialist financial advice to help you make the most of your pay rise and avoid any unintended consequences.

This article is not specific advice. We would always suggest that you get specialist advice in this area.