The current rise in inflation is causing issues for doctors and dentists regarding their NHS pensions and annual allowance. Although it is more likely to impact GPs, hospital doctors may face similar problems if not now, certainly in the future.
Most medics are aware that the annual allowance is not based on your physical contribution to the NHS pension scheme, it is the growth in the pension that is one of the key factors determining your annual allowance each year. Another major influence is inflation, and never has that been more meaningful than in the current environment where the Bank of England are forecasting inflation of 10%.
The key month for inflation as far as the NHS pension scheme is concerned is September. The problem lies in that the HMRC and the NHS pension scheme use September in different tax years. The intention is that the annual allowance figure is used to tax growth after allowing for inflation. The method used for this calculation is causing inflation to generate ‘growth’ figures, consequently causing a potential tax liability.
How are these figures calculated?
Calculating the difference between the opening and closing values of your NHS pension gives a figure showing how much growth has occurred in your pension. The bigger the difference, the greater the pension benefits. A higher inflationary figure increases the opening value and reduces the difference to the closing value, giving you a lower annual allowance. These figures can be found on your annual allowance statement.
As a rough guide, we expect to see lower annual allowance figures when periods of high inflation follow lower and conversely higher annual allowance when periods of lower inflation are followed by higher. Salary increases impact this too, but as I wish to retain your interest, let me leave this topic for another day!
So where is the problem?
HMRC uses the September CPI (consumer price inflation) from the previous tax year for its calculations. For the 2022/23 tax year, it will be September 2021. The pension agency uses September in the current tax year and September 2022 for the 2022/23 tax year.
The CPI figure for September 2021 was 3.1% and the Bank of England has suggested that inflation may reach 10% in September of 2022. The difference is 6.9%, this is an inflationary lift but will be deemed growth and could potentially cause a tax liability.
The knock-on effect in the following tax year is that for 2023/24 HMRC will use a high inflationary figure (we are assuming 10%). If inflation is lower in September 2023, this would lead to a lower annual allowance figure, and potentially it could even be negative.
The problem with a negative annual allowance is that it is not actually counted as a deficit, and the growth is just set at nil. The BMA has launched a calculator aimed to indicate what your annual allowance may be. The BMA CPI modeller for GP pension scheme requires you to have up to date information on your pension, usually found on your total reward statement. However, these statements tend to be at least 18 months behind schedule, especially those for GPs! It is based on the McCloud remedy moving your service back to the 1995 scheme. Although you will not have these figures yet you will get a good indication from a recent total reward statement.
The increases will be experienced by GPs still in the ’95 and 2008 section as well as GPs and hospital doctors in the 2015 section.
Why is this impacting GPs more than hospital doctors?
GPs have a career average revalued earnings system that uses the dynamization process to account for inflation. Hospital doctors in the ‘95 section of the pension scheme use a final salary based pension scheme whilst active members.
What does this mean for the next tax year?
We are in a position whereby someone’s superannuated income could remain relatively flat yet their annual allowance position could be hugely different over the two tax years due to inflation.
The BMA is lobbying the government as we seem to be facing yet another issue where the consequences of the taxation surrounding pensions could lead to significant unrest.
There has already been one intervention in the 2019/20 tax year where they provided compensation arrangements – could we be seeing another? This is an evolving topic – so keep checking back with us for updates on this important issue.
Next month…I will be talking about how those in retirement or close to retirement could benefit from a higher pension due to the inflationary rises. A quirk in the system!
If you have any queries or questions regarding annual allowance or any of the issues discussed in this article, do not hesitate to get in touch.