Have you received a higher than expected annual allowance for the 2020/21 tax year? I have been approached by a number of clients who have been concerned about their annual allowance figures for 2020/21. I always believe it helps to have a bit of an understanding of what happens under the bonnet to see if the figures you are getting are accurate, and what the prospects are for the next few years.
Just because your income has seen little movement doesn’t necessarily mean that your annual allowance will follow suit. Those of you who follow us regularly will know the annual allowance is not based on your physical contribution.
Requesting your most recent NHS pension statement, showing your pension growth in the previous tax year from July each year can help with your understanding of the situation. You can request your NHS pension statement by emailing: firstname.lastname@example.org. Please allow up to 12 weeks for this to arrive.
Upon receipt of your NHS pension statement, it is important to carry out a sense check to see if you can spot any obvious errors. We recommend you pass them to your adviser and accountant as soon as you can to give them as much time as possible to look at the situation.
So, what could be the cause of your higher annual allowance?
If you have low inflation it can lead to higher annual allowance figures and vice versa, so higher inflation, lower annual allowance figures. Your pension will have an opening value at the start of the tax year and a closing value. The closing value is then uplifted by inflation for the start of the following year, thus can have a dampening effect on your annual allowance. You in effect have a higher starting figure – the higher the inflationary figure the more dampening.
The September Consumer Price Index (CPI) from the previous tax year is the inflationary figure that is used. In 2019 the CPI figure was 1.7% so a slightly lower inflationary figure than what was targeted. In 2020 CPI was only 0.5% so it doesn’t bode well for the tax year 2021/22. This is exacerbated by an above inflationary pay increase in the 2020/21 tax year of 3% (I am not commenting on how well deserved this is or if it should have been more). We therefore, have a substantial gap between the inflationary figure and the pay increase which is a recipe for higher annual allowance figures.
If we look closer to the present day, the CPI for September 2021 is 3.1% which is considerably higher than the previous year, so unless you receive a substantial pay increase in the 2022/23 tax year we could expect a relatively lower annual allowance.
If you are moving up a pay grade (Hos Docs) or your profits have improved (GMP/GDP) this could also have a significant impact on your annual allowance. There may be little you can do about this, but it may be helpful to be forewarned.
As most of you are aware the McCloud age discrimination case is going through the courts. Those people who were a member of the NHS pension scheme prior to April 2012 will return to their legacy scheme, be that the 95 or 2015 NHS pension scheme until March 2022. All the annual allowance figures will need to be recalculated. For most, we expect this will see a lowering of their annual accrual as these schemes were less generous in their annual accrual than the 2015 NHS pension scheme.
Legal & Medical can carry out a fixed-fee analysis of your annual allowance situation, so please do get in touch.
Is your annual allowance bill bigger than expected? Let us know by adding a comment below.