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How will annual allowance be reassessed and considerations for 2022-23

The background to the McCloud Rectification is summarised here. In summary, the McCloud rectification is about placing individuals back into their legacy pension schemes covering the period from April 2015 to April 2022. This was done because the transition of some individuals to the 2015 scheme was deemed illegal.

The annual allowance tax charge is one which arises when the deemed growth in your NHS pension benefits (and other pension contributions outside of the scheme) exceeded the allowance set by the government. How this allowance was set also changed over the remedy period so each year may have a different calculation.

One of the implications of putting people back into their legacy schemes is that the Annual Allowances Pension Tax charge needs to get recalculated as the method for calculating the pension growth in each section is different. In a lot of cases this will go down but in some it may increase. In addition, doctors need to consider if they have a charge for the 2022-23 tax year.

If you have previously been subject to an annual allowance tax charge or potentially will be following these changes then the following needs to be considered;

  1. Annual Allowance Tax Charge for 2022-23: Historically, individuals who had to pay an annual allowance tax charge had to include it on their tax return, even if the scheme paid it. However, there’s good news. HMRC has confirmed that those affected by the McCloud rectification do not need to put their annual allowance tax charge on their 2022-23 tax return. Instead, a new reporting system will be introduced for this year where you will make this disclosure and deal with how you pay the tax outside of the tax return. Its worth pointing out that this does not mean you don’t have a tax disclosure to make – its just not on your tax return and also this only applies to people affected by the rectification process.
  2. Deadline Extension: The deadline for adjusting figures related to annual allowance tax charges for the period from 2015/16 to 2022/23 has been extended to 31 January 2025. Normally for 2022/23 it would have been 31 January 2024.  This extension provides more time for individuals to received updated calculations for 2022/23.
  3. Remedial Statements: The Pensions Agency will issue remedial statements to affected individuals, which will cover all years of annual allowance tax charges. These statements will help assess whether you’ve overpaid or underpaid your annual allowance and make necessary adjustments. However, the exact format of these statements is yet to be determined. For people in receipt of their pension this will be from 1 October 2023. The government have send an end date for October 2024 for all people.
  4. Overpaid annual allowance tax – if you have overpaid tax this will be refunded either to you if you paid it or the the pension scheme if you opted for the tax originally to pay paid by the NHS pension. In the latters case the scheme will then also adjust any historic scheme pays elections.
  5. Underpaid annual allowance tax – only some years will be deemed as in scope i.e. subject to the need to amend. These are the 2019/20 tax years onwards. If you have additional tax to declare for those years then Scheme Pays will be available or alternatively you can pay the tax yourself.

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What You Need to Do:

  • If you expect an annual allowance tax charge for 2022-23 and fall under the McCloud remedy, you don’t need to include it on your tax return for that year.
  • Wait for the Pensions Agency to contact you with a remedial statement, likely in 2024. However when you receive this you have a short period to act.
  • On retirement, you’ll have the choice to remain in your legacy scheme or transition to the 2015 scheme. You don’t need to make this decision now.
  • Share any paperwork related to the pension rectification with your financial advisor or accountant. Please also see our page relating to whether you need an advisor or not.
  • Failure to act may result in interest and penalties being charged

Conclusion: These changes in NHS pensions are significant, and it’s crucial for healthcare professionals to stay informed. If you have a specialist medical accountant or financial advisor, they should be well-versed in these matters. However, if you don’t, consider seeking expert guidance to navigate these complex pension adjustments. The key takeaway is to be prepared, keep your records up to date – or if you are a GP make sure they are up to date, and watch for communications from the Pensions Agency as the deadline for adjustments approaches.

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