Chapter 7 – Financial matters
By: Dr Emma Wain
Financial matters can be a very complicated and poorly understood subject. Money is however currently a vital part of life. Pay is the compensation with which your employer rewards you for the provision of your time and expertise, but with that comes additional issues like tax and pensions. Many people will be able to understand and calculate these correctly for themselves, but lots will not, and there will be times during a career when all of us may need additional help. There are particular idiosyncrasies associated with working for the NHS, in particular with relation to the pension scheme, so if you do think you need advice, then it might be sensible in the first instance to ask your colleagues if they have needed assistance, and if so, where they found this. There are lots of financial advisors available, but a personal recommendation goes a long way in providing reassurance that the help you receive will be appropriate.
Contracts and salaries
- Contract of employment – all employees have a contract of employment with their employer. This sets out the employee’s rights, responsibilities, employment conditions and duties. It is legally binding and must be adhered to until it ends. It does not have to be written down, but in the NHS, a written contract should be provided to you on or before your first day of employment. There are terms and conditions of service available on both NHS Employers and the British Medical Association (BMA) website for all nationally negotiated contracts. There are currently SAS doctors employed on what are known as the pre-2008, the 2008 and the 2021 contracts (Staff, associate specialist and specialty doctor contract (bma.org.uk))
- Pay scales – all nationally negotiated contracts have an agreed pay scale, which is available on the NHS Employers and BMA websites. These are different in the four nations of the UK. Pay scales for SAS doctors in England (bma.org.uk); Pay scales for SAS doctors in Scotland (bma.org.uk); Pay scales for SAS doctors in Wales (bma.org.uk) and Pay scales for SAS doctors in Northern Ireland (bma.org.uk)
- Increment – this describes the increase in pay that occurs with increasing time in a role. All nationally negotiated contracts have an incremental pay scale that an individual will have the opportunity to progress through. Different grades have different criteria for progression. The date on which progression occurs is different for every individual and generally reflects an individual’s starting date of employment in the NHS. The starting point on any pay scale will be dependent on previous experience
- Salary – This is the fixed amount of money or compensation paid to an employee by an employer in return for work performed. It is usually quoted on an annual basis and paid monthly in 12 equal instalments on a fixed day each month
- Gross – this is the salary paid before any deduction
- Net – this is the amount paid after deductions, i.e. the amount received into an individual’s bank account
- Deductions – this is the term used to describe all amounts paid from your salary at source before you receive it, e.g. tax, national insurance, pension contributions. Your employer cannot make deductions from your pay unless it is allowed for by law, you have agreed in writing, it is allowed for in your contract, it is the result of strike action, a court has told your employer to or it is to repay a previous overpayment
- Leave – this represents a period of time for which an employee is not at work. There are several different types of leave including annual, sick, study, parental and unpaid. Entitlements to leave are defined in advance; some will be determined nationally and set out in your contract of employment and others are determined by law. Some entitlements change with length of service, for example, additional annual leave with increasing years served, entitlement to additional maternity leave. Some Trusts allow employees to purchase additional annual leave. There is helpful information about annual leave here: Doctors’ annual leave entitlements (bma.org.uk), maternity/parental leave here: Maternity, paternity and adoption advice and support (bma.org.uk). Sick leave entitlement also builds up with length of service but may also be extended by your employer. NHS entitlements are as follow:
i. During your first year of NHS employment: 1 month’s full pay; 2 months’ half pay if you have completed 4 months
ii. During your second year: 2 months’ full pay and 2 months’ half pay
iii. During your third year: 4 months’ full pay and 4 months’ half pay.
iv. During your fourth and fifth years: 5 months’ full pay and 5 months’ half pay.
v. After completing 5 years of service: 6 months’ full pay and 6 months’ half pay.
A pension forms part of your overall pay reward and reflects a deferred income. It is a way of saving for your retirement that is arranged by your employer. The NHS has a pension scheme that both employers and employees make contributions to, which will provide an income in retirement in line with the rules of that particular scheme.
- There are currently three different NHS pension schemes known as the 1995, 2008 and 2015 schemes. They are all defined benefit schemes, i.e. the pension provides you with a guaranteed income for life based on your salary and number of years you have paid into the pension scheme. Both the 1995 and 2008 schemes pay a pension based on your final NHS salary, whereas the 2015 scheme pays a pension based on your career average salary. An overview of the schemes can be found here: NHS Pensions Schemes – an overview (nhsbsa.nhs.uk)
- Pension contributions are paid from gross income, i.e. before your income is assessed for tax due and, in the NHS scheme, are currently on a tiered basis with the percentage of your salary paid increasing as your salary increases. The current contribution rates can be found here: NHS pension contribution rates (bma.org.uk)
- You do not have to be a member of the NHS pension scheme but there is a useful overview of the benefits of being in the NHS pension scheme here: NHS Pension Scheme. The value of membership (nhsbsa.nhs.uk)
- As well as providing a pension, membership of the NHS pension scheme also provides death in service benefits. Again, these benefits are different for the different schemes but broadly the benefits are composed of a lump sum payment and an ongoing monthly pension for dependents. Details of this can be found here: Death in service and your pension (bma.org.uk)
- The McCloud judgment – which NHS pension scheme you are in depends on when you started working in the NHS. Anyone who started working in the NHS since March 2012 will have all of their pension in the 2015 NHS scheme. The situation is more complicated for those that joined the NHS pension scheme before then following the ruling that the introduction of the 2015 scheme was discriminatory on the grounds of age (the McCloud judgment). Everyone employed prior to March 2012 will be a member of either the 1995 and 2015 schemes or the 2008 and 2015 schemes. Currently, all service between 2015 and 2022 is being moved back into the employee’s original scheme, but at retirement, an individual will be able to make the choice on whether to keep these 7 years of contributions in either the 1995 or 2008 scheme (whichever one they were in originally), or transfer it to the 2015 scheme. This is a unique calculation and what is right for one person may not be for another. This is an evolving situation and may be subject to further amendment
- Annual allowance tax – the annual allowance is the maximum amount of pension savings an individual can make each year without an annual allowance charge and was introduced in 2006. However, it was the introduction of the annual allowance taper in 2016 (which reduced the amount your pension was allowed to grow by free of tax once you earned over £150,000) that really caused problems for doctors in the NHS pension scheme. This has been partially addressed in the budget in 2023 with an increase in the annual allowance to £60,000 with a concomitant increase in the taper. As this tax was not abolished, it is still important to be aware of it as further changes may occur in the future. Calculating this tax charge yourself is very complicated as it does not fit into a defined benefit scheme in a straightforward way. It is a good habit to ask the NHS Business Services Authority for an annual allowance statement every year. This can be done by emailing [email protected] and including your full name, date of birth, full address and postcode, superannuation division (SD) number (this can be found on your NHS total rewards statement found through the electronic staff record (ESR) or on your payslip if your Trust issues this through ESR)
- Amendments to the NHS pension scheme were also announced in December 2022, which will allow partial retirement in all schemes, i.e. you can draw up to 100% of your pension from the 1995 scheme and continue to work without a break in employment and still contribute to the 2015 scheme. The 2008 and 2015 schemes have been amended too to allow you to draw 100% of the benefit (previously only 80% was allowed). This will take effect from October 2023 and at the time of writing the full details of this have not yet been announced, but it will require a drop in pensionable pay of at least 10% for the first year after taking your pension benefits. This letter explains the current situation: NHSPensions_FlexibleRetirement_DisclosureLetter_202301.pdf (nhsbsa.nhs.uk). Additional information is available here: Partial retirement (nhsbsa.nhs.uk)
We pay tax in all sorts of ways, some very obvious, for example, income tax on salary, and some not so obvious, for example, value-added tax (VAT) on certain goods. There are also taxes paid to local government as well as national, for example, council tax, which is based on the value of the property in which you live. The information below is an attempt to give an understandable overview of the tax system in relation to tax on income.
Income tax – this reflects deductions made in payment to His Majesty’s Revenue & Customs (HMRC; i.e. the government of the day) as tax based on the amount earned. Different proportions of tax are taken at different salary levels. Income paid directly by your employer is subject to Pay as you Earn (PAYE) so will have tax taken off before it is paid to you. All income is subject to assessment for tax including interest earned on savings and share dividend income. Income Tax rates and Personal Allowances: Current rates and allowances – GOV.UK (www.gov.uk) (England, Wales and Northern Ireland) Income Tax in Scotland: Current rates – GOV.UK (www.gov.uk) (Scotland).
National Insurance – this is a specific type of tax that is paid on income earned through employment by both employees and employers. It is used to qualify for and fund social security benefits and is paid as a proportion of your gross income. This is deducted directly from your salary by your employer. National Insurance rates and categories: Contribution rates – GOV.UK (www.gov.uk).
Personal Allowance – this is the amount of any income that is allowed to be paid without any tax being due. Currently, up to £12,570 can be earned before any tax is due. Once an individual earns over £100,000 this allowance is reduced by £1 for every £2 earned over this amount until all of the allowance is lost. Income Tax rates and Personal Allowances: Current rates and allowances – GOV.UK (www.gov.uk).
Tax code – this can be found on your payslip and essentially represents the portion of your income that will be paid before tax is applied. It will differ depending on how much your personal allowance is worth. When you move jobs, you may be put on an emergency tax code as your employer will not know how much of your personal allowance you have left for that tax year. This can mean that you pay tax on your entire salary (often called emergency tax), so it is important to check this and make sure you claim back any overpaid tax on a tax return.
P60 – this is an annual statement from your employer of income earned and tax paid in a particular tax year. It is normally issued around May and is important for you to be able to file a correct tax return.
P45 – this is the statement issued at the end of your employment with a particular employer that will give information about the amount earned and the amount of tax paid. It is important for your next employer to have this information so that you are paid using the correct tax code and do not pay too much tax.
Tax year – this describes the period of 12 months, which is used by the government as a basis for calculating taxes and for organising its finances and accounts. In the UK, this runs from 6 April of one year to 5 April of the next and, in practice, it is this period that is covered by an individual’s tax return.
Tax return – this is a form used by the taxpayer to make an individual submission of income and personal circumstances that is used to assess the tax due. This can be submitted as a paper version or online through the HMRC self-assessment service. If submitted online, this will calculate the tax due for you on the basis of the figures you enter. Not everyone has to submit a tax return but there are several requirements for doing so including if one is requested by HMRC, if an individual believes that they owe more tax than has been paid at the end of the tax year or if an individual has been paid more than £100,000. The deadline for submission of a paper tax return is 31 October after the relevant tax year and for online submission 31 January of the year after the relevant tax year, e.g. for the tax year from 6 April 2023 to 5 April 2024, the online tax return is due by 31 January 2025. All tax is due by 31 January of the year after the relevant tax year. To send in a tax return online, you need to register with HMRC. This is very straightforward and can be done here: Register for Self Assessment: Register if you're not self-employed – GOV.UK (www.gov.uk). There are penalties for late submission and interest can be charged on any tax owed. You can pay an accountant to do it for you, but if your tax affairs are simple (e.g. your income is all PAYE with straightforward savings accounts), then it is very easy to do it yourself. Do not spend money if you do not have to. Self Assessment tax returns: Overview – GOV.UK (www.gov.uk)
Tax-deductible expenses – some professional expenses can be offset against tax, which means that you can pay them out of your gross income before it is assessed for tax due. These expenses broadly cover the cost of going to work and must be incurred wholly and necessarily to enable you to do your job. They include membership of professional bodies including the Association of Anaesthetists, indemnity insurance, General Medical Council (GMC) fees. A list can be found here of eligible organisations: List of approved professional organisations and learned societies (List 3) – GOV.UK (www.gov.uk). These must be claimed back through your tax return if you need to submit one, but if you do not they can be claimed back separately here: Claim tax relief for your job expenses. Professional fees and subscriptions – GOV.UK (www.gov.uk)
Miscellaneous financial matters
- Financial year – this is a term used by government, business and other organisations to describe a 12-month period over which they calculate their budgets, profits and losses. For the UK government this runs from 1 April of one year to 31 March of the next
- Government financial statements – The Chancellor of the Exchequer makes two statements to the House of Commons about the nation’s finances and proposals for changes to taxation annually in the spring and the autumn. These are normally known as the budget and the autumn statement, respectively, although the autumn statement was renamed as the budget in 2016. These are important in that any changes to personal taxes and allowances are announced in these
- Salary sacrifice – this describes a reduction in income paid as cash in return for a non-cash benefit. This can be used in different ways depending on what your employers offer but examples include car parking charges at work, childcare vouchers, additional annual leave, cycle to work scheme. In general, tax and national insurance is then not paid on the part of your income that is used for this purpose; however, it will also reduce the salary on which pension contributions are paid so will reduce pension in retirement (Salary sacrifice and tax-free childcare – NHS Employers)
- Childcare – employers can no longer offer salary sacrifice childcare vouchers to new employees. Instead, a tax-free childcare scheme was introduced in 2017 that is independent of employers. This gives parents with children under the age of 12 or 17 for those with disabilities support with the cost of childcare. For every £8 paid in, the government will top it up by £2 up to a maximum top-up of £2000. Once an individual earns over £100,000, entitlement to this is lost on an all or nothing basis, i.e. if you earn £100.001, you will no longer be eligible for any of this assistance. In addition to this, children aged 3 and 4 are entitled to up to 30 hours free childcare each week for up to 38 weeks of the year. The schemes differ slightly in each of the different nations of the UK but again you are not eligible for this as soon as one parent’s gross income is over £100.000 (except in Scotland where this free childcare is maintained whatever your level of income)
How to interpret your payslip
Your employer will provide you with a monthly record of the money you have received and any deductions they have made. This is called your payslip, and it can be sent in paper form or electronically. All payslips are visible on the ERS along with other information so it is important to set up access to this: Home - ESR Hub - NHS Electronic Staff Record
There is a lot of financial information on a payslip and it is important to know how to interpret this.
There is a good explanation of this on this website here:
Doctors pay slip – a guide to understanding your payslip – Medics Money
In summary, the important information your payslip will include:
Your employment/payroll number that will need to be quoted on any correspondence with your employer regarding salary or expenses claims.
Your employer’s PAYE reference for HMRC, which will need to be entered on your tax return if you complete one.
- Your National Insurance (NI) number – this is used to coordinate your NI payments and hence your entitlements to benefits such as the state pension.
- Your tax code – it is important to check this to make sure that you are not put on an emergency tax code (this takes no account of any personal allowance you may have and means that you will overpay tax).
- Your grade and increment date – check that you are being paid on the correct contract. Your increment date reflects the date on which you will move onto the next pay point and generally reflects the date you started work in a new grade or post. Check this is correct when you move from one employer to the next.
- Your gross basic salary – check that this corresponds to the point on the pay scale that you believe you should be on.
- Your job title and pay scale – a two-figure two-digit code that will tell you the pay scale you are employed on.
- Deductions – this will show the tax paid, the National Insurance paid and your pension contributions.
- At the bottom there will be a summary of all the amounts paid for the tax year to date.
- Also at the bottom is your SD identification number, which is required when requesting information relating to your pension.
- Finally, the last box will show your net pay for that month, which can be checked against pay received.