NHS Pension Scheme: calculation of the annual allowance pensions tax charge for 2022/23

What has been the position

As you’ll be aware, increasing inflation rates have led to larger pension tax charges for members of the NHS pension scheme in the tax year ended 5 April 2022 along with concerns for even larger growth, and so tax charges for the current tax year ended 5 April 2023. This is in view of the 10.1% CPI (consumer price index) rate in September 2022. The reason for the increased growth is because pension benefits, already built up in NHS Pension schemes, grow by not only the pensionable pay earned in the year, but also a revaluation or dynamisation, linked to CPI. Although HMRC calculations of pension growth allow for inflationary growth, there’s a disconnect with how NHS Pensions apply their revaluation/dynamization, compared to the inflationary uplift that HMRC allow. 

NHS Pensions apply the CPI to NHS pension benefits on 1 April. This means that, without any amendment to the scheme regulations, NHS Pension benefits will be revalued/dynamised by 11.6% on 1 April 2023 (CPI plus 1 ½%) and be counted in the tax year ended 5 April 2023 for pension tax-charge purposes. In summary, it will give a much larger closing balance to pension benefits for the tax year ended 5 April 2023, and so the arising pension growth for the tax charge. 

HMRC do allow an inflationary increase, but they base that on the CPI figure from the previous tax year, which was 3.1%.

NHS pension consultation

In December 2022, the NHS Pension Scheme set out a consultation on the following changes to the NHS Pension Scheme:

1. New retirement flexibilities

2. Aligning the CPI for annual allowance tax calculations

3. Scheme access for primary care networks

4. Technical update in respect of member contributions

These are all important changes to NHS pension membership although in this article, we are commenting only on point 2 and the impact on the annual allowance tax calculations.

The consultation ended on 30 January 2023, and full details of the consultation response and actions can be found here https://www.gov.uk/government/consultations/nhs-pension-scheme-proposed-amendments-to-scheme-regulations/outcome/nhs-pension-scheme-proposed-amendments-to-scheme-regulations-consultation-response.

In respect of the application of the CPI inflation rates, NHS Pensions is proposing to amend the regulations as follows:

• Pension benefits in the 2015 section of the NHS pension scheme to be revalued on 6 April 2023 rather than 1 April 2023. To clarify, the revaluation would be 11.6% and based on the CPI as noted above.

• Similarly, dynamisation applied to pension benefits in the 1995/2008 scheme will be applied on 6 April rather than 1 April 2023. The dynamisation factor is similarly 11.6% and so linked to CPI.

This means that the revaluation/dynamisation of 11.6% will not be reflected in closing pension benefits for the pension tax charge in the tax year ended 5 April 2023. Although it will be reflected in the closing benefit pensions for the following tax year, we will also then be able to discount 10.1% for HMRC's “allowed” inflationary uplift. 

Going forward, they are effectively removing the mismatch and ensuring that the annual allowance is measured only in respect of growth above the Consumer Price Index. 

This amendment isn’t retrospective, so it won’t affect those pension tax charges already occurred and paid up to 5 April 2022, although, of course, the McCloud Remedy may adjust those when those are applied.

Need help?

If you would like help with any of the issues discussed above, please get in touch with our specialist Medical accounting team. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Lizzy Lloyd

Partner