NHS Pensions – Annual Allowance “Fix” At Last?
Over the last 12 months or so, there has been a lot of concern among doctors and dentists in relation to the rising inflation rates and the impact this has on their NHS pension growth and corresponding annual allowance tax charges.
By way of a quick recap, the annual allowance is a limit against which your NHS pension growth (plus any private pension contributions) is monitored. The annual allowance is currently £40,000 (though can be reduced/tapered for those with taxable income over £200,000), but is due to increase to £60,000 from 6 April 2023. 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 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% (Sep21) to 10.1% (Sep22) 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 doctors and dentists previously not affected by the annual allowance were likely to find themselves with issues for 2022/23.
After mounting pressure from the BMA, the government released a consultation in December 2022 which proposed a “pension fix”. Hot off the press at the time of writing, it has now been confirmed (March 2023) that this fix will go ahead as planned. This fix will effectively remove the inflation element of growth from the annual allowance calculation and only monitor pension growth that is 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 looming for many doctors and dentists.
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. Doctors and dentists with high 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.
