Pension Annual Allowance - reducing the risk of a tax charge

After a number of years when the tax raised through pension annual allowance charges has risen - particularly from GPs and other NHS professionals, the Government has realised what a disincentive this is for healthcare professionals and has begun to address the issue.
 

The technical bit

One technical mismatch between the annual allowance rules and the way NHS pension savings are measured has come into sharper focus as inflation has increased. A pension input period is the period for which growth in pension savings are measured. Since 6 April 2016, pension input periods have been aligned with the tax year. This means that for tax purposes, the growth in the pension scheme has been calculated based upon pension savings between 6 April and the following 5 April. However, the increase in 2015 Scheme NHS Pension benefits for GPs are calculated based upon a 31 March year end and have an in-service revaluation on 1 April each year.

The 2015 Scheme in-service revaluation and the calculation of the pension input period both use consumer price index (CPI). Yet, because there is a disparity between the periods being used, inflation has unintentionally been included within the growth for annual allowance purposes. The rapid increase in CPI has exacerbated this timing mismatch and for many GPs this has caused significant annual allowance tax charges being triggered in recent years.

Following a consultation earlier this year, the Government has decided that the yearly in-service revaluation will move from 1 April to 6 April from 6 April 2023: for 2022/23 this removes a 7% increase in the value that would have solely arisen due to inflation. The effect of aligning the CPI figure used in both the calculation of pension benefits and pension input period, is that the annual allowance growth statement that you receive each year for 2022/23 onwards will only consider growth in pension savings above inflation. This welcome change should result in a significant reduction in the pension growth figure calculated each year - and, in turn, reduce the likelihood of annual allowance tax charges for many GPs.

Tax charges are still likely to apply where individuals have high income and suffer abated annual allowances but even these will be lower following this change.
 

Further beneficial changes

As discussed in the last article, further welcome changes were announced in the Budget with a 50% increase in the annual allowance to £60,000, and the minimum allowance increasing from £4,000 to £10,000. The Government also announced an increase in the adjusted income threshold to £260,000 and that where individuals have multiple scheme entitlements (i.e. are accruing benefits under both the 1995/2008 and 2015 pension schemes) these can be aggregated so that negative growth in one scheme can be offset against positive growth in the other.

Further changes have been made to the NHS pensions scheme allowing greater flexibility in retirement including partial retirement, pension re-employment and the removal of the 16-hour rule.

All these changes are welcome, and while GPs’ risks of pension annual allowance tax charges will remain, they will be significantly reduced and many GPs will have new options in planning for their retirement. For help and advice on this or any other tax issue, please get in touch with our team.

 

Contact

Juliette Smith, Midlands Director/Private Client Services
E: Juliette.Smith@bdo.co.uk
DDI: +44(0)121 265 7209
Mobile: +44(0)7807 021 030

Aimee Winterbone
Director; Medical/Business Services & Outsourcing
E: aimee.winterbone@bdo.co.uk
DDI: +44(0)1473 320803
Mobile: +44(0)7553 201456