Updates post-Budget 2023

Part 5

Lifetime and annual allowance tax charges

The lifetime and annual allowance tax charges are a hot topic for GPs. They have been subject to constant changes by recent governments seeking to limit tax relief on pension growth for higher earners. The most recent changes came in the Spring 2023 budget. While the majority of the NHS Pension Scheme’s 1.7m members will not be impacted by either of these tax charges, it is important for practice managers to understand them and how they might affect the GPs in their practices. There are also instances where the annual allowance charge might affect practice managers or non-GPs who are partners in their practice.

Lifetime allowance

The lifetime allowance was a tax charge levied at retirement if the benefits of the pension scheme member are valued above a certain limit.

Up to 5 April 2023 the lifetime allowance had been frozen at £1,073,100. With the NHS Pension Scheme, the valuation is calculated using a factor of 20 x the pension plus any lump sum received.

As an illustration, a member of the 1995 section with an annual pension above £46,656 would have been at risk of a lifetime allowance charge.

Any lifetime allowance tax was paid on behalf of the member by the pension scheme. This was then recovered through a deduction from the annual pension.

From 6 April 2023 the government has proposed that there will be no lifetime allowance tax charges for those exceeding the thresholds. The lifetime allowance concept has not been abolished entirely, however. There remains a possibility of tax to pay on very large cash lump sums. In normal circumstances though, no individual should face a tax charge.

Annual allowance

The annual allowance (AA) tax charge, which was £40,000, is applied to any year where the growth of pension value exceeds a certain limit. The government has increased this to £60,000 from 6 April 2023. Other changes to the scheme and tax rules should allow for more predictability in annual allowance growth calculations.

It is important to note that the measurement of growth does not equal the value of pension contributions paid during the year. Instead, NHS Pensions measure growth by looking at the pension value at the start of the tax year and comparing it with the pension value at the end of the tax year.

If the difference in value, when multiplied by 16 and adjusted for inflation, exceeds £40,000 up to 5 April 2023 or £60,000 after 6 April 2023, an AA tax charge will be levied.

Income needs to be high in a year for the AA tax charge to become an issue. Also, members of the NHS Pension Scheme boosting their pension with additional contributions (known as ‘added years’) might be affected.

In addition, non-GP partners, such as practice manager partners, may have high growth in years where their profit share has risen significantly.

If you have exceeded the annual allowance level, NHS Pensions are required to send you a Pension Savings Statement showing the in-year growth.

Steps to take if AA allowances are exceeded

The most important thing is not to panic. Tax charges do not mean that contributions to the NHS Pension Scheme should stop.

For members of the NHS Pension Scheme with an annual allowance tax charge, the first port of call is to use any unused allowances from the previous three tax years to reduce the charge. They can then opt for the scheme to pay the tax, although this will again result in a slightly reduced pension on retirement.

It is essential not to pull out of the scheme without having considered all the options, including the lost benefits from the ill health and death in service cover.

To read the previous parts, click here