Over the last 12 months or so, there has been a lot of concern among dentists in relation to the rising inflation rates and the impact this has on their NHS pension growth and subsequent annual allowance tax charges.
By way of a quick recap, the annual allowance is a £40,000 limit (which can be reduced/tapered for those with taxable income over £200,000) which your NHS pension growth (plus any private pension contributions) is monitored against. Tax charges can arise if your NHS pension growth (plus any private pension contributions) exceeds the annual allowance.
To calculate NHS pension growth, your pension is effectively valued for tax purposes at the start of each year and then again at the end of the year and in broad terms the difference between these two valuations is your pension growth figure. Historically, there have been essentially two main factors that can affect the level of your pension growth. Firstly the level of the income that you pension, and secondly inflation rates which NHS pensions use to apply the annual pension uplift. It is this second factor that has been causing concern recently and what has now prompted the so called “pension fix”.
The calculations are complex, but in general when inflation increases, this tends to result in a high level of pension growth and therefore an increased risk of annual allowance tax charges. In the current 2022/23 tax year we have seen inflation rates that are the highest they have been in 40 years. The relevant inflation rates for annual allowance pension purposes increased from 3.1% (Sept 2021) to 10.1% (Sept 2022) which is unprecedented and was likely to produce some incredibly high NHS pension growth figures. We were therefore expecting to see some significant annual allowance tax charges for the year. In addition, it was likely that a lot of dentists previously not affected by the annual allowance were likely to find themselves with issues for 2022/23.
After mounting pressure from the BDA, the government released a consultation in December 2022 which proposed a “pension fix”. Hot off the press as of the time of writing, it has now been confirmed (early March 2023) that this fix will go ahead as planned. This fix will effectively remove the inflation element from the annual allowance calculation and only monitor pension growth in excess of inflation which was arguably the policy intention in the first place.
This is a very welcome change and it is good to see the government take action on this after listening to the widely publicised issues that were on the horizon for many dentists across the country.
The way the calculations will now work should actually result in a relatively low year of NHS pension growth for 2022/23 for most members so the significant annual allowance charges that were feared are now likely to be much reduced.
Whilst this pension fix is very good news, it is worth noting that it does not mean that annual allowance issues have suddenly disappeared for everyone. Dentists with high NHS income and/or significant NHS pension pots, or those with taxable income over £200,000 who are subject to a tapered annual allowance, are all still at risk.
As specialist dental accountants we have the NHS pension expertise in our tax team to monitor your NHS pension growth against the annual allowance each year and provide proactive advice in relation to mitigation strategies.
If you would like to speak to one of our specialists please feel free to give us a call on 01768 864466 or email hello@doddaccountants.co.uk.
Return to In The Know Dental index.
