We are working on a series of articles to keep you informed about the latest news regarding the NHS pension scheme. Fortunately, this month’s main headline is positive news related to tax – a rare but beautiful thing! Two significant changes will impact the amount of tax you may need to pay concerning your NHS pension scheme.
1. Negative growth
Navigating the intricacies of the NHS pension scheme (NHSPS) involves understanding the nuances of its various sections, namely the 1995, 2008, and 2015 components. One recurring concern that resonates with many NHSPS members is the annual allowance, a critical threshold dictating the permissible limit for pension contributions each year.
The annual allowance serves a crucial purpose designed to tax pension growth exceeding a specified threshold, factoring in the impact of inflation. However, the complexities arise due to the disparity in the dates used for calculating inflation. This discrepancy has, at times, led to individuals facing taxation for inflationary increases or witnessing a decline in the value of their pension relative to inflation. It’s a scenario that particularly impacts the 1995 and 2008 pension sections.
It is the decline in value relative to inflation that has given cause for concern. If your pension values fall in real terms, surely this should be considered when calculating your annual allowance – alas, this is not the case.
Currently, the system treats negative growth as equivalent to no growth, reflecting a zero value on the annual allowance statement. This practice, while straightforward, doesn’t necessarily align with the economic realities faced by pension scheme participants.
Enter the Spring Budget of 2023… a beacon of hope for those grappling with this issue. Proposed adjustments aimed to rectify the current practice by allowing negative growth to be offset against growth in the 2015 pension section. This proposed change is not just a procedural shift; it could have tangible benefits for individuals navigating scenarios where there’s a high Consumer Price Index (CPI) and low wage inflation.
Consider a situation where CPI is soaring at over 10%, while wage inflation lags at 6% ( a real-life scenario in recent times). Under the existing system, this misalignment could result in a substantial negative growth figure. The proposed remedy opens up the possibility of utilising this negative growth to offset the growth in the 2015 pension section. This adjustment could translate into a welcome reduction in annual allowance positions, offering relief to those facing or who would otherwise face tax charges.
As NHSPS members ponder their financial future within the framework of these changes, the spring budget in 2023 emerges as a potential game changer, promising a more equitable and flexible approach to annual allowance calculations. The evolution of pension regulations continues, and members are encouraged to stay informed and adapt their strategies accordingly to make the most of these positive adjustments.
2. Beneficial change
This brings me to the 2nd beneficial change. The persistent issue of misaligned inflationary dates within the NHS pension scheme has been a cause for concern among members. To recap briefly, while the NHS employs the September Consumer Price Index (CPI) for calculating inflationary increases, the March CPI is utilised for annual allowance calculations. This mismatch had the potential to result in NHSPS members facing annual allowance charges for inflationary increases – a far from ideal outcome.
Fortunately, a positive shift is underway. It’s encouraging to see that common sense is prevailing, and efforts are being made to align these crucial dates with the start of the next financial year on 6th April. While it might not immediately strike one as a monumental issue, the real impact lies in the potential repercussions had this misalignment not been rectified. The alignment of these dates is a step toward mitigating ongoing and potentially substantial impacts on annual allowance calculations.
This seemingly subtle adjustment underscores the importance of addressing even seemingly minor discrepancies within pension schemes. As members navigate the ever-evolving landscape of pension policies, staying informed about such positive changes ensures they can make well-informed decisions and plan for a more stable financial future.
A nice start to the new year, let’s hope there is more good news to follow as the year progresses! As always if you need further explanation on the details discussed do get in touch.
Tax is dependent on your own circumstances and situation and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation.
This article is not specific advice. We would always suggest that you get specialist advice in this area.