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Public sector pay rises may bring extra tax bills and cause civil servants to retire early

Public sector pay rises could have unforeseen surprises for higher-paid employees in the public sector.

“The Government’s announcement of significant pay rises for the public sector (the biggest for six years), will be welcomed by many employees in this sector, as something which is long overdue,’ said Robert, an employment and expatriate tax specialist with the firm, ‘but they could have some unforeseen surprises for higher-paid employees in the sector.”

He added, “Many higher-earners, who typically benefit from defined benefit pension arrangements, could face an additional tax charge on the contributions that they and their employers make into their pension scheme each year.”

Salter said, “For some high earners, including senior civil servants and consultants, pension contributions (which for defined benefit schemes is based on a formula) above £10,000 per annum result in the ‘excess’ contributions being a taxable benefit (e.g. when the individual prepares their annual tax return).”

Many higher-earners, who typically benefit from defined benefit pension arrangements, could face an additional tax charge.

He added “Individuals with a ‘lifetime pension allowance’ in excess of £1,055,000 for the 2019/20 tax year could face an effective tax liability on their excess pension of 55%. This is in contrast to the 20% or 40% that a pensioner would typically face on their ‘normal pension’ income.

“This lifetime pension allowance has already been blamed for encouraging many consultants and GPs, for example, to retire ‘prematurely’, to avoid the relatively punitive taxes that they would otherwise face on their marginal pensions and one, unintended consequence of the pay rise might therefore be that more senior public sector employees also look to retire prematurely in the coming months.”

For more information, please contact Robert Salter.