Inflation is on the rise in the UK and CPI (a measure of inflation used by the UK government) in July 2022 was measured at 10.1%, with experts predicting this could rise even higher in the coming months.
One aspect of inflation that you may not be aware of is that your pension input is affected by inflation in two ways. Pension input is essentially the growth in your pension value that is measured against the pension annual allowance to determine whether there is a pension annual allowance tax charge for the year.
Pension input is calculated as the difference in the value of your NHS pension between the start of the tax year (the opening value) and the value of your NHS pension at the end of the tax year (the closing value). It is not based on the amount of pension contributions made by yourself or the NHS.
The opening value for 2022-23 is calculated as your NHS pension accrual as of 31st March 2022 multiplied by 16. This value is then increased by CPI – the CPI value used is as of September 2021, which was 3.1%.
The closing value for 2022-23 is calculated as your NHS pension accrual as of 31st March 2023 (which includes another year of NHS pension accrual for 2022-23) multiplied by 16. It therefore
doesn’t appear at first sight that the high inflation rates seen in 2022-23 will impact on your closing pension value.
However, hidden within this calculation is that your pension accrual as of 31st March 2023 is increased by treasury order plus 1.5%. Treasury order typically aligns with the CPI rate of the previous September so September 2022 for the 2022-23 financial year. Treasury order is not yet known but if inflation stays at high levels, pension input will be higher than normal for NHS dentists due to the increased uplift in pension benefits on 31st March 2023.
As an example, if we take a dentist who has pension accrued as of 31st March 2022 of £30,000 per annum (an opening value of £494,880 for the 2022-23 pension input calculation). They earn £54,000 of NHS income in the year and have profits of £58,000. If we assume treasury order will be 9%, their pension input will be well in excess of £40,000 and they may be subject to a pension tax charge in 2022-23, depending on whether they have any unused pension annual allowances to carry forward from the previous 3 tax years. In previous years, this dentist would not have a pension input close to breaching the annual allowance.
Even a younger dentist who has accrued £20,000 of annual pension benefits as of 31st March 2022 and has annual NHS income of £54,000 will likely see a pension input over the £40,000 annual allowance threshold. As you can see, there is a misalignment between the inflation rate used in the opening value and the inflation rate in the closing value, which has a major effect on pension input in years where inflation soars.
The BDA and BMA have highlighted this to the government and several politicians have been raising this issue in parliament. There are several ways the government can resolve this and we will let you know if there are any legislation changes to the NHS pension scheme or pension annual allowance tax rules to alleviate the impact of soaring inflation on NHS pension input.
The largest impact will be for older dentists who have significant NHS pension accrual to date and are continuing to carry out some NHS work, dentists with higher NHS earnings and dentists with higher profits who are subject to tapering of their annual allowance below £40,000.
Particular care should be taken by dentists who are contributing to both their NHS pension scheme and a private pension. Meeting with your independent financial advisor to discuss your pension planning would be encouraged for 2022-23.
If you do have any questions regarding the pension annual allowance for 2022-23 and any other questions surrounding the NHS pension, please contact [email protected].
