Pensions - Articles - The pay rise that never was


New analysis by pension firm Royal London has found that thousands of public sector workers could see their newly-announced pay rises largely or wholly wiped out because of a series of ‘cliff-edge’ rules in their pension scheme. This includes NHS staff who have just received their pay increase in July as well as teachers, civil servants and others who have yet to have a pay uplift. NHS staff have told Royal London they were shocked to discover that their pay had hardly risen or in some cases even fallen following the recent ‘pay rise’, with Band 5 nurses particularly affected.

 The problem arises from the way in which pension contribution rates are hiked when workers pass certain earnings thresholds. The new higher pension contribution rate is payable on the *whole* of their salary, not just on the pay rise. Nearly a third of any pay rise disappears in tax and NICs for a standard rate taxpayer, and the extra pension contribution can wipe out the benefit of a pay increase.

 The following table shows how pension contribution rates are structured for NHS staff (other public service schemes operate on a similar ‘slab’ structure, but with different contribution rates and bands):
 

 Source: http://www.nhsemployers.org/your-workforce/pay-and-reward/pensions/pension-contribution-tax-relief

 Different NHS staff will be on different pay bands and will have had different pay increases, but the following example shows how a hypothetical NHS employee on £26,500 per year could end up out of pocket if they got a 2% pay rise:
  

 

 As the table shows, the key point is that the worker goes from paying a pension contribution of 7.1% of their wage to paying 9.3% of their wage, having moved into a higher contribution band. This more than wipes out the value of the pay increase.

 Commenting, Steve Webb, Director of Policy at Royal London said: “After nearly a decade of pay squeezes, millions of public sector workers will have hoped and expected to see a meaningful pay rise this year. But because of the way in which pension contributions are structured, many thousands will see their pay rise wiped out in full or in part. Public sector employers have a duty to make sure that workers understand the impact of these factors on their take-home pay, rather than leaving them to find out when they get their first payslip at the new rate, which has been the experience for too many hard-working NHS staff”.
  

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