NHS pension annual allowance

The annual allowance is a threshold which restricts the amount of pension savings you are allowed each year before tax charges apply.

In the budget on 15 March 2023, the Chancellor announced that the annual allowance threshold would be raised to £60,000 and the minimum tapered AA would increase to £10,000 from 6 April 2023.

It was also announced in the Budget that open and closed public sector schemes would be considered linked so as to enable any negative growth in any legacy public sector schemes to be offset against growth in reformed schemes.

Tapered annual allowance 2023/24

Adjusted income includes all pension contributions (including any employer contributions). Threshold income excludes pension contributions.
In the NHS pension scheme, you add pension growth to threshold income to get adjusted income.
If your threshold income is above £200,000 and your adjusted income is below £260,000 you will be subject to the standard annual allowance.
If your threshold income is above £200,000 and your adjusted income is above £260,000 then your annual allowance will be reduced. For each £2 that your adjusted income exceeds £260,000, your annual allowance threshold is reduced by £1. If your adjusted income exceeds £360,000 or over then you will have a reduced annual allowance of £10,000
If your threshold income is under £200,000 you will not be subject to the taper irrespective of the level of adjusted income.

Use the HMRC tapered annual allowance tool to calculate if you are subject to tapering.

The NHS pension scheme will not necessarily know if you are subject to tapering and if you are subject to the taper you should request a statement.

Your annual allowance statement

The pensions agencies issue statements at the beginning of October relating to the previous tax year. Statements issued in October 2022 will relate to pension growth in the 2021/22 year.

Due to the McCloud age discrimination remedy, which is to be implemented from October 2023, the statements for 2022/23 will have an extended deadline of 6 October 2024 for members whose service reverts to their legacy schemes.

GPs

Due to the certification process required to verify GP earnings and contributions annual allowance statements for GPs are usually late.

GPs are therefore required to estimate their position to be able to pay charges when due and apply for scheme pays.

Nations

NHSBSA (England and Wales) and the HSC (Northern Ireland) should issue statements if the combined growth between the 1995/2008 and 2015 schemes exceeds the standard annual allowance.

The SPPA (Scotland) is currently unable to issue combined statements and you will need to request a statement to ensure that your combined growth does not produce a tax charge.

In all nations we recommend you make a request for a pension saving statement on a yearly basis.

What your statement includes

The scheme will provide you with details of the current year's growth and that of the three previous years. Unused allowance in these years may be carried forward to offset any tax charge. The relevant limit will be detailed against each year (when the limit was previously different).

Pension input start date

Pension input start date indicates the beginning of the tax year being assessed.

Pension input end

Pension input end date indicates the end of the tax year being assessed.

Annual allowance

Annual allowance details the actual or notional limit during the period.

Pension input amount

Pension input amount details the growth in NHS benefits during the PIP (pension input period).

Ensuring your statement is right

Hospital doctors 1995/2008 section accrual

The benefits will be calculated with reference to your years of service (including any added years or additional pension) and your pensionable pay (this figure will have been provided by your employer).
You may wish to query this if you have received lump sum arrears for pay awards, increments or pensionable CEA which were paid in the current year but should have been paid in a previous year or where growth in 1995/2008 accrual is significantly high.
You can request details of your service record and a breakdown of the calculations from the scheme administrator - these need to be checked as they form the basis of the calculation of pensions growth.

GPs 1995/2008 section accrual

The benefits will be calculated with reference to your earnings (after allowing for inflation proofing) and will include any added years or additional pension purchased.
You can request details of your dynamising sheet (a record of GP earnings) and a breakdown of the calculations from the scheme administrator - these need to be checked as they form the basis of the calculations of pension growth.
You may require the assistance of your accountant to verify the figures.

2015 scheme accrual

Your benefits in the 2015 scheme will be calculated with reference to each years pensionable earnings.
If you do not have a break in pensionable service of five years or more, any benefits in the 1995/2008 will continue to be linked to current pensionable pay (hospital doctors) or in line with the consumer prices index plus 1.5% (GPs).
If you have had a break in pensionable service of five years or more the ‘final salary’ link is broken in relation to your 1995/2008 benefits and only your 2015 benefits will receive active revaluation for service since the break and be subject to testing against the annual allowance.

If you believe that the statement is incorrect you can ask for details of the service and pay that it is based on. If this proves the statement to be wrong you can request another one based on your correct details. The deadlines for completing tax returns or scheme pays elections will not necessarily be extended to allow for this and these may need to be completed on an estimate basis.

Your employer will need to send the corrected details to the pensions agency to enable a new corrected statement to be provided.

Receiving a backdated pay award

If you have received a backdated or late pay award you should contact your employers pensions or payroll department to ensure that your pension records are amended to reflect what your pensionable pay should have been had you been paid correctly on time.

If this is not done, the increase will count against your annual allowance in the year it is paid.

Other genuine errors (eg payroll identifying an underpayment in your agreed pay and correcting it at a later date) can also be allocated to the year(s) in which they should have been paid.

You may want to review your position to see if it is in your financial interests to have any late payment backdated.

Should you be financially disadvantaged by any errors made by your employer you may be able to seek compensation and should contact us.

What to do if you exceed the limit

You can carry forward any unused allowances from the three immediately preceding years to offset the excess.
From 2023/24 any negative growth in the 1995/2008 scheme can be used to offset growth in the 2015 scheme.
You will only need to pay additional tax if you have insufficient carry forward allowance to offset the excess over the limit from the three previous tax years.
If you still exceed the carry forward limit, you need to add the excess amount to your taxable income and you will pay tax at your marginal rate.
You can opt for the scheme pays method of repayment. Read guidance for those in England and Wales, Northern Ireland and Scotland.
In all cases you can pay the charge through the completion of a self-assessment tax return.
You can use voluntary scheme pays where your excess growth is above your individual tapered limit but not necessarily above the standard £60,000 limit and the above other qualifying conditions are met.
You can use mandatory scheme pays where your excess growth is above the standard £60,000 limit.

Read guidance for those in England and Wales, Northern Ireland and Scotland.

Scheme pays

When you have a tax charge, you can elect for the scheme to pay the charge on your behalf in return for an appropriate reduction to your NHS benefits.

This election needs to have been received by the scheme administrator by 31 July following the January in which the annual allowance charge must be declared on the tax return (eg 31 July 2023 for the 2021/22 PIP).

Electing for the scheme to pay the charge will result in a reduction to your pension at retirement (and to the lump sum for 1995 section members).

If you are a deferred scheme member

If you have been deferred through the entirety of a pension input period (1 April to 31 March in relation to the NHS) then the annual allowance rules will not apply to you. If you have only been deferred for part of an input period, the rules will apply for the period of active membership.

Even where you have been deferred for a full input period you continue to have carry forward for that year to use against future growth (assuming it falls to be carried forward as part of the last three years).

BMA lobbying on pensions tax

Our 'annual allowance pensions taxation' campaign resulted in an increase to the standard annual allowance and tapered adjusted income as well addressing the Consumer Prices Index disconnect for NHS pension schemes and the negative growth issue in public sector schemes, meaning lesser impact of the annual allowance taxation on senior doctors.

Read article