Finally, we have some good news about your NHS pension scheme and annual allowance, as the government is expected to amend NHS pension rules. On the 22nd of September, the then secretary of state for Health & Social Care, Therese Coffey, announced the government’s ‘plan for patients policy paper’, which set out to tackle some pressing issues facing the NHS today. Namely, the annual allowance misalignment of CPI figures.
The most eye-catching of which was ‘correcting pension rules regarding inflation’. The annual allowance is aimed at taxing growth in excess of inflation. Currently, inflationary increases are contributing towards annual allowance tax charges.
For those who haven’t read our article You’ve received an HMRC annual allowance statement – what do you do now? In short, this is where the CPI inflation figure used to revalue previously accrued NHS pension is based on the value of inflation from the current tax year (e.g., using CPI in Sept 2022 was 10.1%). However, the allowable inflationary growth taken into account before your ‘growth’ in your pension measured against your annual allowance (AA), uses inflation in the preceding year (e.g., CPI in Sept 2021 was 3.1%). This 7% difference may cause many doctors an expensive annual allowance tax headache.
The government is proposing moving the date revaluation takes place (this hasn’t been confirmed and could still change) from the 31st of March to the first Monday of the new tax year. This will mean the CPI values used are the same and will stop any further inflationary disconnect. The aim is annual allowance taxation ceases to be due on an inflationary difference which was the original intention. This is excellent news!
When will this happen…if it happens?
Once confirmed, these changes are expected to take effect in the current tax year (2022-23). Meaning, Career Averaged Revalued Earnings (CARE) revaluation will be applied around the 10th of April 2023 for the 2023-24 tax year.
This is huge and will affect thousands, particularly GPs who were facing enormous annual allowance tax bills as their entire pension, including legacy 1995/2008 pensions were in effect a CARE scheme, while most other doctors transitioned out of the old 1995 and 2008 pension schemes in relatively recent years.
It’s a good thing for many – but not all!
Please note this only applies to England and Wales, although one would hope Scotland and Northern Ireland duplicate this arrangement. It is also only applicable to the NHS pension scheme, so those doctors in the armed forces, local government or university schemes will not benefit from this change. The BMA is lobbying hard on the subject, so we will update you if this changes.
What doesn’t this change achieve?
It totally ignores the associated issue of “negative growth”. When reforms to the various pension scheme sections take place negative growth can occur in one scheme (e.g., the 1995/2008 scheme). This negative growth is rounded up to zero and cannot be offset against positive growth in the 2015 scheme. It is unjust and unhelpful, especially in the context of sub-inflationary pay awards. The BMA is pushing hard for the government to correct this by amending the Finance Act so that “negative growth” in one scheme can either be offset against growth in another, or carried forward or backwards into other tax years. We are not holding our breath on this one!
Are there any other useful measures being proposed by the government?
The government is ‘encouraging’ NHS trusts to explore local solutions for senior doctors affected by annual allowance tax charges, such as pension recycling. For those in the dark about recycling, it occurs when employees have opted out of the NHS pension scheme for tax reasons. Employers may pay any unused employer contributions as additional salary. Some Trusts do currently offer this, and some do not.
Alert! Opting out of the NHS pension scheme is something no one should undertake lightly, and I stress you should take advice before doing this.
Although all this is good news – I stress the word ‘encouraging’ in the government’s language and in no way a mandated directive to Trusts. However, I would hope to see an end to the postcode lottery of this option being available in some Trusts but not in neighbouring ones. If your Trust has previously been unreceptive to recycling, this may be something they will revisit.
Wales, Scotland and Northern Ireland are ahead of the curve on pension recycling!
In Wales, every health board offers pension recycling but does cap the rate of contributions paid as additional salary to 14.3%. Scotland has been offering a recycling scheme to all for some while. In Northern Ireland, the Department of Health has agreed to develop a policy on recycling, and we are awaiting further details on this.
It’s never dull being a financial advisor specialising in the NHS pension scheme, but in my 25 + years, I don’t think I have experienced so many changes in such a short space of time.
As ever, we will endeavour to keep you informed as the situation develops, and continue to offer the most up-to-date and appropriate advice possible.
This article is not specific advice. We would always suggest that you get specialist advice in this area. To discuss how the topic in this article will affect your situation, please contact your Legal and Medical Advisor.