The Spring Budget delivered on 15 March 2023 included changes to pension tax that will affect employers and staff.
18 May 2023
The changes announced could encourage staff to remain in NHS employment or to take on additional work to help alleviate workforce challenges.
In the Spring Budget 2023, the Chancellor announced changes to pension taxation that have a positive impact on some workforce challenges in the NHS.
By reducing or removing pension taxation for members of the NHS Pension Scheme, the changes could encourage staff to remain in NHS employment or take on additional work.
How annual allowance has changed
Annual allowance (AA) is the maximum amount an individual can build up in tax-relieved pension savings in each tax year.
The Budget increased the AA from £40,000 to £60,000 from 6 April 2023.
Individuals will continue to be able to carry forward unused AA from the previous three tax years.
This change will reduce or remove tax charges received by members who breach the AA going forward.
A member of the NHS Pension Scheme whose pension grows by £3,750 (Pension Input Amount of £60,000) in the 2023/24 tax year (and has no other sources of pension growth) will no longer breach the standard AA and will have no tax charge to settle.
Our ready reckoner tool will be updated for the 2023/24 tax year. It aims to help members to understand the benefits they are building up and whether they may need to give some further thought to their AA position.
Please note: In defined benefit schemes like the NHS Pension Scheme, the AA is tested against the pension built up over the tax year (above inflation) multiplied by a factor of 16 and is not related to the amount of contributions paid.
Changes to the tapered annual allowance
Annual Allowance tapering affects high-earning members when both their threshold income (broadly, their taxable income from all sources) and adjusted income (broadly, threshold income plus pension growth) breach set limits.
The Budget increased the adjusted income, from which the AA begins to be tapered from,£240,000 to £260,000 as of 6 April 2023.
It also increased the minimum tapered annual allowance from £4,000 to £10,000 from 6 April 2023.
This change will mean that fewer high earners will be affected by the tapered annual allowance.
Those who may previously have been affected may reconsider decisions to limit additional work, which could positively impact workforce and capacity planning for employers.
Employers may want to consider how they can target support for staff who are still affected by the tapered annual allowance through an employer contribution scheme and by encouraging them to consider independent financial advice.
Our pension tax guidance details the local options employers can put in place to support staff facing pension tax issues. Our ready reckoner tool will be updated for the 2023/24 tax year, which can help staff assess their Annual Allowance tax liability.
Linking the 1995/2008 and 2015 Schemes for AA calculations
Although the NHS Pension Scheme is referred to as one scheme, in practice it is two separately registered schemes with HMRC – the 1995/2008 scheme and the 2015 scheme.
Many NHS Pension Scheme members with benefits in the 2015 scheme have also retained a final salary link to their 1995/2008 scheme benefits, meaning that pension growth can come from both schemes.
From the 2023/24 tax year, the two schemes will be considered linked for the purposes of calculating AA charges. This will allow members to offset negative real growth in the 1995/2008 scheme against positive real growth in the 2015 scheme for AA purposes.
We welcome the change to linking the two schemes for this purpose as it is anticipated that this change will reduce the number of members breaching the AA, or reduce the amount the allowance is breached by, thereby removing, or reducing resulting tax charges.
In August 2022, NHS Employers wrote a letter to the Chancellor of the Exchequer asking them to consider this change to allow doctors to tackle NHS waiting lists.
Changes to the lifetime allowance
The lifetime allowance (LA) is the amount of tax-relieved pension savings that an individual can build up over their lifetime.
The Spring Budget announced that the LA tax charge would be removed completely from 6 April 2023.
There will be no LA tax charges from the 2023/24 tax year. The removal of the LA tax charge is a welcome addition to a range of options employers have to make working in the NHS for longer a more attractive option, for staff who would otherwise have considered retiring earlier in order to avoid a tax charge. Staff are also now able to take their benefits from the 1995/2008 section and continue to build up pension benefits in the 2015 scheme.
What the changes mean for employers with recycling policies in place
Some employers have implemented policies to pay unused employer contributions as additional salary to allow staff who are likely to have pensions tax issues to manage their pensions tax without missing out on part of their total reward. These policies are discretionary and are based on the needs of each organisation. Eligible employees opt out of the NHS Pension Scheme and receive the additional pay. To date, eligibility to access contribution recycling is typically based on whether a member is likely to breach either of the AA or LA.
Because the LA tax charge is being removed effective from the 2023/24 tax year, LA contribution recycling policies will no longer have a purpose.
These employers may wish to consider an annual allowance-based policy as this may have a positive impact on service capacity and ability to reduce waiting lists. Employers may wish to consider targeting support for staff who may be affected by the tapered annual allowance. You can find out more about recycling contributions in our pension tax guidance for employers.
Our ready reckoner tool will be updated for the 2023/24 tax year. It aims to help members to understand the benefits they are building up and whether they may need to give some further thought to their Annual Allowance position. Pension tax is a complicated area and we encourage staff to seek independent financial advice if they are concerned about their pension tax liabilities.
There were other changes to pension taxation announced which are included below.
Separate to the Spring Budget, it was announced in March 2023 that the Consumer Price Index (CPI) inflation figure used for the revaluation of benefits in the NHS Pension Scheme will be aligned with that used the in AA calculations from the 2022/23 tax year. It is important to highlight this change as another measure which has mitigated the impact of the AA on members.
For all pension schemes, the maximum tax-free cash lump sum at retirement will be fixed at £268,275 from 2023/24 and beyond (except where protections apply) – with no indexation, meaning it will not increase to keep pace with inflation.
This figure is 25 per cent of the now removed LA of £1,073,100. Members will still be able to access all their benefits but can take a maximum lump sum of this figure without incurring a tax charge. This is expected to apply to a smaller number of high earners or those who have long pensionable service. A member would need a pension of more than £50,000 per annum at retirement to be affected by this cap.
You can find out more about the options available for cash lump sum in each scheme.
Members holding certificates for enhanced protection or any fixed protection (applied for before the date of the Budget, 15 March 2023, and a certificate or reference number subsequently issued) will continue to be able to build up new pension benefits, join new pension arrangements and transfer from 6 April 2023 without losing this protection.
Individuals with a protected right to a higher tax-free cash sum on 5 April 2023 will continue to be able to access this right. This is a reassuring news for those who have taken this action.
The impact on retention and workforce challenges
The changes will remove or reduce pension taxation faced by some NHS Pension Scheme members.
No members taking benefits from 6 April 2023 will face LA tax charges.
Some members will still face AA charges, but such instances will be reduced, and any charges faced by members will be lower.
Members will be able to make decisions about their work commitments without having to mitigate against pension tax liabilities. Staff can take on additional work or continue to work in the NHS and build up further pension in the Scheme (where they may have previously considered retiring), without facing tax charges. These changes will support employers in their efforts to address workforce challenges and reduce waiting lists.
It is worth nothing that pensions policies are continually reviewed by government and could be changed in the future.
Actions for employers
Identify members who may still face pension tax issues
Though fewer members will now face pensions tax issues, a proportion of the workforce will still breach the AA. Employers may find it beneficial to identify staff members who may still face pension tax issues and target their support.
The new AA of £60,000 equates to an increase in annual pension (above inflation) of £3,750 pa (because £3,750 x 16, the factor used to value pensions for AA purposes, equals £60,000).
In the NHS Pension Scheme, where members build up 1/54th of pensionable pay each year, pensionable pay of £202,500 would produce a pension of £3,750 in one year. As a result, members who only have 2015 scheme benefits and who have pensionable NHS earnings approaching £200,000 could still face AA issues.
There are some additional things to look out for
- If members also have service in the 1995/2008 scheme, the final salary link means that any pay rises significantly above inflation could give rise to AA issues, particularly if the member has a lot of service in that scheme. This may affect those earning lower NHS pensionable salaries.
- If members have significant earnings outside the NHS, the taper will start to bite and those earning lower NHS pensionable salaries can be affected.
Communicate pension tax and the support available to affected staff
It is important for employers to communicate to staff the range of support they offer for those who may still be affected by pension tax issues. We have produced a range of resources to support employers:
- Guidance on the local options employers can put in place to support staff facing pension tax issues.
- The NHS Pension Scheme Annual Allowance Ready Reckoner supports members to assess their annual allowance liability. It will be updated for the 2023/24 tax year.
- A list of organisationsthat can give expert guidance and advice on pension tax issues for members of the NHS Pension Scheme is available on our website.
- Key information about the AA tax charge.
Pension taxation is a very individual and complex issue and members who are concerned should speak to their employer and consider seeking financial advice.