Annual Allowance and the NHS Pension Schemes for Tax Year 2022/23

If you are affected by the McCloud remedy, you will not receive pensions tax information as usual this year. This is a highly technical issue, and if you are affected by Annual Allowance, you are strongly advised to use the services of a competent accountant. You may also find it useful to share this information with your accountant.

The CPI disconnect

The BDA previously advised about a large Annual Allowance charge for the tax year 2022/23. What has been done about this?

Early in 2022, we recognised that the process for calculating Pension Input Amounts in the NHS Pension Schemes (which are measured against the Annual Allowance, to determine if any tax charge arises) was flawed. In the context of rapidly rising inflation, retaining the existing methodology would have led to tax bills that would be vastly increased.

Following intensive lobbying, the Government has agreed to introduce changes that fix the process and avoid such tax charges arising. Doing this involves delaying the dynamisation or revaluation of NHS Pensions, from 1 April 2023 until 6 April 2024.

This means that large inflationary increases to NHS Pensions will not be counted in the 22/23 tax year, but instead be included in the 2023/24 tax year.

So, this just defers the problem until next year?

Yes, and no. These inflationary increases are based upon an inflation rate of 10.1%. The Pension Input Amount calculations make allowance for a level of inflationary increase, but this is based upon an older level of inflation. For tax year 2022/23, the allowance was 3.1%. Pensions revaluations and dynamisations of the order of more than 10% would be significantly higher than the 3.1% allowed for, and so Annual Allowance charges would be much more likely to have arisen.

For the 2023/24 tax year, the allowance for an inflationary increase will be aligned with the 10.1% level of pension growth, and so better aligned with the level of NHS pension growth, which have been delayed by five days.

Will this reduce the level of my NHS pension?

No.

Will this situation be overturned in future years?

We don’t believe so – the deferral of annual increases should remain permanent, meaning that this problem will not arise again in the future.

What will the impact be?

It is generally impossible to say with any precision. The figures you receive for the 2022/23 tax year will reflect the new approach, which will result in a lower Pension Input Amount than would otherwise have been the case.

We have been advised of one member who has received Pension Input figures for 2022/23. Initially these were incorrectly calculated, without taking into account the delay to dynamisation/revaluation. On receipt of the corrected figures, it was immediately clear that a much lower Pension Input Amount applies and that a five-figure Annual Allowance tax charge has been avoided.

Please note this is one individual – everyone’s circumstances are different; and your Pension Input Amounts (and subsequent Annual Allowance position) will be a factor of your earnings and NHS service.

The McCloud remedy

Will the ongoing McCloud Remedy affect my Annual Allowance position for 2022/23?

Unfortunately, the extensive work that is necessary to implement the McCloud remedy means that Pension Savings Statements will not be published as usual for many people.

If you are either:
• Not eligible for McCloud remedy because you joined the pension scheme after March 2012, or
• A member who was fully protected, and didn’t see your pension scheme change between April 2015 and March 2022

Then you can expect to receive a Pension Savings Statement as usual.

Everyone else (incorporating the group of members who were members of the pension scheme before April 2012 and who did see their pension scheme change between April 2015 and March 2022) will not receive a Pension Savings Statement for 2022/23 until October 2024.

This group will see their NHS pension, as built up between April 2015 and March 2022, converted back to being part of the older NHS Pension Schemes.

This conversion means that the Annual Allowance tax calculation will change for this group for each tax year between April 2015 and March 2022. Pension schemes will provide updated information for each of these tax years, and HMRC will make a bespoke online tool available which will allow this updated information to be submitted, and your tax position to be remedied. Further guidance on this will be made available in 2024.

If I don’t Receive a Pensions Savings Statement, how can I complete my 2022/23 Tax Return?

HMRC has confirmed that members affected by the McCloud Remedy should not complete information relevant to Annual Allowance in their 2022/23 tax return.

The expectation is that with information for 2022/23 being provided by October 2024, this will be included either in the 2023/24 tax return (Pension Input Amounts for 2022/23 will be declared alongside Pension Input Amounts for 2023/24) or they will be declared in the bespoke HMRC online tool. Deadlines for accessing the Scheme Pays facility for any Annual Allowance charges will be similarly extended.

If the declaration of my Pension Input Amount information is delayed by one tax year, does this mean I could face two Annual Allowance charges in one go, in January 2025?

Yes, this is potentially the case, if you have breached both:
• the Annual Allowance in 2022/23 (although this is less likely as Pension Input Amounts do not include any revaluation or dynamisation)
• the Annual Allowance in 2023/24 (a larger Annual Allowance of £60,000 is available this tax year).

However, members will continue to be able to access the Scheme Pays facility, meaning that the pension scheme will pay these charges on your behalf. The deadline for applying for this will be extended for those whose 2022/23 Pension Input Amount information is delayed.

Find out more

NHS BSA has published comprehensive information to support you on understanding the effect of rollback on annual allowance.

If you would like further guidance or advice regarding your pension, you can contact our partners at Lloyd & Whyte.