Annual allowance warning for GPs

As we make a start on our medical clients’ tax returns for the 2021/22 tax year, a common question we’re being asked by GPs is “what will my annual allowance tax charge be this year, given the increase in inflation?”

My initial response has generally been something along the lines of “it will depend on your circumstances and level of earnings, but it’s likely to be quite significant.”

However, with the recent announcement that inflation for April 2022 was at 9%, and suggestions that this could rise further throughout the year, the question really ought to be: “What on earth is my annual allowance charge going to be for 2022/23 and is there anything I can do now to prepare for, or at least mitigate this?”

How do I know if this affects me?

As a quick reminder, growth in the NHS Pension Scheme is geared to your pensionable earnings each year, plus an uplift on benefits accrued to date, which is linked to Consumer Price Index (CPI) rates. Your pension is allowed to grow by inflation each year, but the allowed growth is based on CPI inflation for the previous September, whereas the actual growth is based on the current year’s September CPI inflation rate, plus 1.5%. For the 2021/22 tax year the uplift is 4.6% (3.1% CPI for September 2021 plus the extra 1.5%) and the allowed growth is restricted to only 0.5% (CPI from September 2020), giving a net growth for annual allowance purposes of 4.1%.

This is not entirely unusual, but as inflation rates have been coming down in recent years the growth has been much lower and generally under control, so the spike in growth this year is not unexpected. Fast forward to the 2022/23 tax year and based on current CPI rates, this growth increases to 7.4% (9% CPI plus 1.5% less 3.1% CPI) and could be higher still if inflation continues to rise.

The 2021/22 tax year has already passed, so there’s very little that can be done now to influence the results, other than to start saving in case a charge arises or consider electing for scheme pays, however we’re still in time to do something about 2022/23.

If you’re a hospital doctor, the calculations work differently for the 1995 scheme element of your pension, but this would still be relevant to you if you have built up benefits in the 2015 scheme or have had an increase in your pensionable pay.

Can you give me an idea of the figures?

As a very rough example, someone who has accrued £30,000 of benefits to date in the 1995 scheme and has a pensionable pay of £120,000 would have growth for annual allowance purposes of around £60,000 against an available allowance that year of £40,000. Assuming there was no unused relief available from previous years, this would give a taxable excess of £20,000, which taxed at 40% gives an addition tax charge of £8,000 for the year. Payments on account for 2022/23 would then increase by half of this, so a total increase in tax due in January 2023 of £12,000.

For the 2022/23 year, the same example would generate growth of around £80,000 in total. This is £40,000 over the standard £40,000 allowance, pushing the additional tax charge up to over £16,000.

Please note the actual calculations are far more complex than this, so the above figures are for illustrative purposes only.

Those members with a long-standing service record and higher earnings will see much higher growth and may be exposed to the additional 45% rate of tax on the excess growth. If your taxable income is over £200,000, it’s likely that you will also see your annual allowance tapered down below the standard level of £40,000, which increases the annual allowance excess, and therefore additional tax charges even further. As a result, it’s certainly worth thinking about your own position now.

It’s also worth noting that rising CPI rates increases the value of your pension for lifetime allowance purposes too, which could lead to additional tax charges arising when you draw benefits from the scheme.

What can I do about it?

There are several options available to you that can reduce the pension growth and tax charges arising, but these options have other implications and reduce your pension benefits on retirement, so there’s no simple solution. We’d be happy to help by reviewing your pension position and discussing the figures with you, so please get in touch if you would like to know more. We’d also recommend that you speak to an independent financial adviser before making any decisions which affect your pension.

If you have any concerns regarding your pension tax charge or have any other questions, please get in touch with your usual Larking Gowen contact or look for contact details in the Our People section of the our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Carl Boardman