2017/18 tax returns may bring an unpleasant tax bill for many GPs and dentists in the NHS Pension scheme due to the inflation rate set in September last year. 

Your pension calculations

Under the 1995/2008 Sections of NHS Pension Scheme your pension is calculated on your “dynamised earnings”. Each year a record of your earnings is logged and added to all previous years’ earnings which adds up to your total earnings overtime. Your final pension is a percentage of this total.

For those of you under the new 2015 Section of NHS Pension Scheme your benefits you have accrued in previous years are revalued in line with your career average revalued earnings known as CARE.

Some of you will have a combination of both these sections

To ensure your previous years’ earnings are in line with inflation, a factor is applied to them each year to ‘uprate them’. This is called dynamising, or revaluing.

The impact of inflation

To dynamise your earnings or revalue your benefits, the NHS Pension Scheme adds the Consumer Price Index figure (CPI), as a measure of inflation, plus 1.5%. CPI is set in September each year.

In September 2017, CPI was 3%, which means for 2017/18 your earnings will be increased by 4.5%.

While this will mean a significant increase to your pension pot, the tax applied is also considerable., it is this growth in your pension benefits that can cause tax implications with regards to the annual allowance.

Your annual pension allowance

Your annual pension allowance is how much you can contribute, without tax applying, each year. For members under the NHS Pension Scheme, your pension allowance is based on your deemed pension contribution (growth in benefits) and not your actual contribution. Also, the CPI figure of the previous tax year is applied to this allowance. The inflation rate in September 2016 was 1%.

So, while your pension benefits have increased by 4.5% your annual pension allowance for 2017/18 will only increase by 1%, and here lies the issue.

What can you do?

There are many factors at play and of course everyone’s circumstances are different, plus rules change.

We recommend that you speak to your accountant sooner rather than later to understand your own personal situation and get an idea as to if you are likely to be affected in 2017/18 tax year.

If you'd like to find out more, get in touch with me Louise Peters at: Louise.Peters@jcca.co.uk.