Inflation - a major issue for NHS Pension Scheme members

Alex Harrington
Stock image - medical

The purpose of the Annual Allowance legislation is to measure pension growth above inflation, with any excess above the Annual Allowance (standard of £40,000, or lower if tapered), being taxed at your respective marginal rate of income tax.

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However, due to the way inflation is factored into calculating defined benefit pension growth, and with the current backdrop of rising inflation, GPs are likely to face significant Annual Allowance charges in both the 2021/22 and 2022/23 tax years (the latter being the most significant).

Calculating pension input growth

Firstly, to calculate pension growth for the year, we take accrued benefits at the start of the tax year and multiply these by 16 plus lump sum – this provides us with our opening position. We then uplift our opening position for inflation (with reference to the Consumer Price Index – CPI). To calculate our closing position, we take our benefits as at the end of the tax year and ‘dynamise’ or ‘revalue’ these for inflation (being CPI plus 1.5%), subsequently multiplying these by 16 plus lump sum. The pension growth for the year is the difference between the opening and closing positions.

Why is there likely to be a problem for GPs in 2022/23?

The issue currently presenting itself to NHS Pension Scheme Members arises due to Section 235 of the Finance Act 2004 dictating that two different CPI values are used for uplifting the opening value for Annual Allowance purposes, and dynamising/revaluing pension benefits respectively. In calculating pension input growth for the 2022/23 tax year, we would uplift the opening value as at 6 April 2022, using CPI as at September 2021 (3.1%). Conversely, benefits (used to calculate the closing position as at 5 April 2023) would be uplifted by CPI following the commencement of the tax year i.e. September 2022 (currently estimated at 10%, therefore 11.5% being CPI plus 1.5%).

Where inflation is stable, the differentiation between CPI used does not impact, however with inflation currently running at 9%, and with the Bank of England forecasting an increase to 10% later this year, the flaw within the Finance Act is magnified.

As such GPs will likely face significant Annual Allowance tax charges in 2021/22 and 2022/23, with the BMA suggesting that the highest earners could suffer charges equating to half their post-tax income.

There is a further issue in that following a future reduction in CPI, this will likely result in negative growth for Scheme Members in future years. The significance of this is that this is treated as zero for pension input growth purposes and cannot be offset against growth for prior years. 

What action is being taken?

The Association of Independent Specialist Medical Accountants (AISMA), of which Lovewell Blake are a member, have written to the Treasury to highlight the issue (read the full letter here), as well as suggesting potential solutions to be implemented with immediate effect. These include the following:

  • Revise S235(3) of the Finance Act to harmonise the CPI used for the opening value and uplifting benefits.
  • To allow negative growth to be offset against real growth – including the carry back to previous years.
  • The re-introduction of a compensation policy scheme (akin to the one brought in for the 2019/20 tax year), whereby any charge is covered by way of a Scheme Pays Election and covered by NHS England.

What can I do?

The BMA have created a CPI Modeller for the NHS Pension Scheme which will allow you to assess your respective position. In order to utilise the modeller, you will need to ensure that you have a copy of your recent Total Rewards Statement or Annual Benefit Statement.

Annual Allowance issues are particularly complex, and we recommend that you take financial advice before making any decisions – our NHS Pension Specialist Matthew Harrington will be able to assist with your personalised planning.

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