Pensions - Annual Allowance Charges Loom due to High CPI

08 June 2022

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Although the government took action in the 2020 Budget to limit the impact of the pensions annual allowance charge by raising relevant thresholds, the current high rate of inflation may bring back the spectre of the annual allowance charge for many GPs.

As a reminder, for 2021/22 where an individual’s ‘adjusted income’ exceeds £240,000, the £40,000 AA must be restricted by £1 for every £2 of income in excess of £200,000 down to a minimum of £4,000. When these thresholds were introduced, they meant that many NHS clinicians would no longer have their AA restricted. However, even where an individual’s ‘adjusted income’ doesn’t exceed £240,000, it is still possible for the annual allowance to apply if that year’s increase in pension entitlement exceeds £40,000 in value. 

In many practices, GP’s have seen their income rise significantly during the pandemic, and this is expected to push more over the £240,000 adjusted income threshold than in past years, so they will end up with a restricted annual allowance. For those that do breach the threshold, the fact that their pension entitlement growth is linked to the Consumer Price Index (CPI) rate of inflation is not helpful when inflation is rising rapidly – some estimate it will reach as high as 10% by the end of 2022.

The practical difficulty for GPs is how to deal with the annual allowance for 2021/22 in your tax returns: in most cases these will be completed before final pension growth numbers for the year are received from the NHS pension scheme. For those with high earnings, estimating whether a charge will arise for 2021/22 will be more difficult than in the past, and those on high incomes should take expert advice on the issue.

Looking ahead, unless there are yet more changes to the NHS pension scheme, it seems even more likely that more GPs will face annual allowance charges for 2022/23 and, perhaps, later years. It is highly unlikely that the government will adjust pension thresholds upwards again: they may even come down as the Treasury searches for more tax revenue post-pandemic.

What are the options if you do face an annual allowance charge? GPs can opt for the ‘scheme pays’ route for annual allowance tax liabilities – broadly, using some of their pension pot to pay the charge now, which means a reduced pension entitlement on retirement. Ultimately, there is also the option of opting out of the pension scheme altogether and independent financial advice must be taken before making this decision, even more care must be taken to understand the impact where your practice accounting year does not run to 31 March or 5 April.

Superficially, these options may look like an attractive way to reduce the administrative hassle associated with the annual allowance. However, beyond tax considerations, GPs should be wary of reducing their entitlement to the NHS pension in any way and should seek detailed pension advice from a suitable qualified IFA before doing so.

If you have any questions on your personal tax position on your pensions, please get in touch with our team.