With inflation on the rise it’s important to consider pension tax charges for NHS pension members.
This has been a huge issue for medical professionals over recent years, which you will be very aware of. Many NHS pension scheme members have reduced hours, declined additional responsibilities, left the scheme or retired altogether. From our experience this has caused many individuals a lot of stress and uncertainty.
Let’s look at a case study:
Dr Brown, ENT Consultant, Member of the 2015 Scheme since 2015.
Current pensionable pay £112,616 rising to £114,868 from April 2023.
IMPORTANT NOTE – CPI September 2021 3.1% rising to potentially 10% September 2022.
As at 5 April 2022 Dr Brown has £15,793 pension accrued which, for the purposes of the Annual Allowance calculation, equates to a capital value £252,688 which is adjusted for inflation using September 2021 CPI of 3.1% so £260,521.
To work out the input for the year we need to value Dr Brown’s benefits at the end of the input period. So the new accrual built up over the year plus the revaluation of benefits already held.
IMPORTANT NOTE – Public Sector pensions are revalued on 1 April each year using the CPI from the preceding September.
As at 5 April 2023 Dr Brown has £19,932 accrued so for capital value purposes equates to £318,912 (16 times).
Take the opening £260,521 away from the closing £318,912 and you get pension input or “growth” of £58,931.
IMPORTANT NOTE This exceeds Dr Brown’s permitted growth in the year of £40,000*. However if the CPI figure for 2022 had been the same as 2021 the growth would have only been £19,709 and well within the limits.
*If taxable income exceeds £200,000 then this limit of £40,000 can be tapered down. Care needs to be taken around this.
The above highlights the issues and the potential that action will need to be taken:
- Check if you have any unused allowances from the preceding 3 tax years that can be offset. These are available on your Annual Pension Savings Statement. NHS Pensions will send you this around October each year if they think you are affected. You can ask for one free of charge by calling 0191 279 0571.
- If not, consider if you will pay the tax charge which is the excess over the Annual Allowance taxed at your highest marginal rate – in Dr Brown’s case, if no carry forward available, potentially 40% of the excess £18,931 so a bill of £7,572. Or Dr Brown can do a Scheme Pay Election and get the pension scheme to pay the tax on his behalf. This has the effect of reducing your pension later on so you should be aware of the eventual cost. See nhsbsa.nhs.uk and input Scheme Pays in the search engine – this will bring up the Scheme Pays FAQs
If you think that you might be affected by this please contact Zach Wall in our Healthcare Accounting Team who can assist you with a calculation, your tax return and Scheme Pay Election if appropriate.
If you need to understand how your NHS Pension will underpin your overall retirement plans please contact Emma Purvis in our Wealth Team.