How pension tax allowance changes help NHS clinicians

Published  28 April 2023
   5 min read

The NHS clearly faces some significant challenges in meeting the demands placed upon it. While some of these issues require increased funding to create more infrastructure (more beds, ambulances etc), some are a result of a pension scheme designed to be an integral part of the remuneration package, but recently proving a disincentive to some higher paid staff.

Many of these are senior clinicians who are retiring, declining promotion, or reluctant to fill the additional shifts needed to clear waiting lists, because it doesn’t make financial sense to do so.

It often falls to the advisers of these clinicians to pick up the financial pieces when potentially eye-watering tax charges drop through the letterbox, which in some cases are totally unexpected. Many senior NHS clinicians have stated recently they feel they’re “paying to go to work”. However, changes announced in the budget on 15th March 2023 combined with commitments made in “NHS Pension Scheme proposed amendments to scheme regulations consultation response” published 7th March 2023, should alleviate many of the clinicians’ concerns. Here we set out some of those pre-existing issues and to explain how, and the extent to which, recent announcements may resolve them.

Annual allowance (AA)

The standard AA is currently £40,000 p.a. and the Chancellor announced an increase to £60,000 effective 6th April 2023. This is likely to take many NHS clinicians out of scope of AA tax charges. However, the process for measuring pension input to defined benefit (DB) pension schemes, including Public Sector pension schemes, could see some pension savers still inadvertently incur an annual allowance tax charge. Pay rises, promotions, additional pensionable work undertaken, and even the cessation of salary exchange arrangements can all give rise to additional pension input, which won’t always be apparent to scheme members until they’re advised of the tax charge.

For those still impacted, advisers need to remain mindful that not all additional payments the NHS make to clinicians are pensionable. Typically, non-routine additional payments such as overtime or bonus payments will not be pensionable. So, clinicians could undertake additional shift work without increasing their pension input, although it could still impact their Tapered Annual Allowance (TAA). Awareness of all this enables more effective conversations with their clinician clients and helps identify whether carry forward may alleviate the problem. Do remember, the AA increase isn’t retrospective, so won’t offer additional allowance to carry forward to the 2023/24 tax year.

Misaligned CPI figures

Another challenge for clinicians trying to keep within their AA has been the interaction of inflationary increases applied to 2015 reformed scheme benefits, and those applied to the opening figure of the AA calculation. At present, pension benefits accrued in the 2015 scheme are adjusted for inflation on 1st April each year by the CPI figure in the previous September. As part of AA measurement, the opening value in the calculation is increased by CPI in September of the preceding tax year. So, in the current 2022/23 tax year, 2015 scheme benefits are increased by the CPI figure in September 2022 which was 10.1%, but the opening value in the AA calculation for the 22/23 tax year is adjusted using the CPI figure for September 2021, which was 3.1%.

The AA is only supposed to measure growth in benefits above inflation, and in periods of relatively static inflation this is broadly achieved. However, in instances where inflation jumps sharply from one year to the next, as is currently the case, the inflationary adjustment can create additional input.

The 7th March consultation response confirmed the government’s intent to move the scheme inflation adjustment from 1st April to 6th April which will fall within the next tax year. This takes effect from 1st April 2023 and will see the same CPI figure used for benefit adjustments and AA measurement meaning only increases above inflation are measured. In fact, it will have a further benefit in the 22/23 tax year as there will be no inflationary increase to 2015 pension benefits, but the AA calculation would still see the opening figure increased by 3.1% resulting in lower input.

Negative Pension input amount (PIA)

This refers to the practice of treating any negative pension input as nil input. This can occur for example when the inflationary uplift applied to the opening figure in the AA calculation is greater than growth in benefits. In instances where members have benefits in both their legacy and reformed pension schemes, the input is calculated for each scheme and added together (along with input to any other scheme including AVC’s). Groups representing NHS scheme members raised concerns that in instances where pension input is negative in one scheme but positive in another, the negative input is taken as a zero figure, and the positive input figure is used in full.

In their opinion, this results in an overstated growth figure being measured against the AA, and seems at odds with the aim of only measuring growth in benefits above inflation. The Budget confirmed that from April 2023 NHS members will be able to offset any negative real growth for annual allowance purposes in their legacy scheme against the AA, thus negating the concern in future years.

Tapered annual allowance (TAA)

The April 2020 increase in the TAA removed an estimated 97% of consultants and 86% of GPs from scope of the taper based on latest earnings data from NHS England. The increase of the adjusted income limit to £260,000 will presumably take even more out of scope, and for those still affected, this increase of the minimum TAA to £10,000 will be welcome.

Lifetime allowance (LTA)

The Chancellor announced the end of the LTA tax charge from 6th April 2023 ahead of abolition of the LTA later in the year. Unsurprisingly, this has been well received by NHS clinicians and associated groups. Many of the measures aimed at retaining senior NHS staff (increased AA, pensionable re-employment for 1995 scheme members) will be less effective if members are facing punitive LTA tax charges diluting their benefits. The government’s decision to remove this charge, in addition to the overall package of measures, hopefully means more senior clinician will stay in NHS employment.

Employer contribution recycling

For those scheme members still considering opting out, remember NHS employers (at least in England and Wales) have the option to offer “recycling” under which members opting out of the scheme receive additional pay in lieu of their employer pension contribution. Regrettably, there’s no current indication of this being mandated across the NHS, so employer uptake could well remain low.

How advisers can help

One way advisers can help clinicians with pension tax issues make good overall decisions around ongoing scheme membership, is to provide robust repeatable analysis of the impact of these tax charges. Pension tax charges, particularly the AA & TAA charges, can look quite punitive if viewed through the lens of a single tax year. But pension payments are ongoing, so the overall benefit needs to be considered, rather than just the initial tax hit. We need to return to a place where all NHS staff feel their pension scheme is a valuable part of their remuneration package.