Letter to the Chancellor of the Exchequer : urgent changes to NHS pension tax calculations needed

Danny Mortimer wrote to the Chancellor of the Exchequer to implore him to take urgent action on the NHS Pensions Scheme to help tackle waiting lists.

4 August 2022

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Employers across the NHS are deeply concerned about the effect the current inflationary environment is having on pension tax, and the impact is having on NHS care, including meeting the Government’s ambitions to tackle the treatment backlogs.

For members of the NHS Pension Scheme, the value of pension savings is based on the growth in the member’s pension over the tax year. Pension growth is calculated by subtracting the value of the member’s pension at the start of the year (the opening value) from the value of the member’s pension at the end of the tax year (the closing value). If the member’s pension growth exceeds the annual allowance, excess benefits may be subject to a tax charge.

It has been standard practice for the NHS Pension Scheme (along with others) to increase the value of pension benefits in April based on the annual increase in inflation to the previous September.

In the 2022/23 tax year, the closing value will include the uprating of career average pensions benefits on 1 April 2023 using the annual increase in CPI inflation measured in September 2022, which the Office for Budget Responsibility has predicted will rise to 8.7%.

However, the opening value is uprated to 5 April 2023 using the annual increase in CPI inflation measured in September 2021 (known to be 3.1%). While both the closing and opening values are uprated for inflation (with the intention of removing pension growth due to inflation from the calculation), for the 2022/23 tax year in particular, the inflation figures used will be dramatically different. Assumed pension growth will be incurred by rapidly increasing inflation rather than above inflationary pension growth.

The letter asks the Chancellor to take two urgent actions 

  1. Allow pension growth across both the NHS Pension scheme and the reformed scheme to be aggregated before it is tested against the annual allowance. 
  2. Amend the calculations so that pension growth, which is solely caused by rapidly increasing inflation within the tax year, is not included and tested against the annual allowance.