Example 1a – Promotion from specialist registrar to consultant (Protected member)
Andy is promoted from specialist registrar (SpR) to consultant and his pensionable salary increases from £47,132 to £77,913. He is a fully protected member in the NHS Pension Scheme (1995 Section) and has completed 20 years’ membership at the end of the Pension Input Period prior to the current one.
Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”:
Pension = £47,132 x 20/80 = £11,783
“Inflation proof” Pension = £11,783 x (1+2%) = £12,019
Lump sum = 3 x £11,783 = £35,349
“Inflation proof” Lump Sum = £35,349 x (1+2%) = £36,056
Step 2: Calculate pension benefit at the end of the current Pension Input Period:
Pension = (£77,913 x 21/80) = £20,452
Lump sum = 3 x £20,452 = £61,356
Step 3: Calculate increase in pension benefit value over the Pension Input Period:
Pension = (£20,452 - £12,019) x 16 = £134,928
Lump sum = (£61,356 - £35,349) = £26,007
Total change: £134,928 + £26,007 = £160,935
Step 4: Calculate threshold income, adjusted income, and Annual Allowance:
As his taxable income is less than £110,000, Andy is not affected by Tapered AA and his Annual Allowance for the year is £40,000
Step 5: Test against Annual Allowance:
Increase in growth from Step 3: £160,935
Annual Allowance from Step 4: £40,000
So, Annual Allowance exceeded by: £160,935 - £40,000 = £120,935
Step 6: Carried forward Annual Allowance from previous 3 years: £50,000 (say)
Step 7: Calculate any tax charge payable:
Amount Annual Allowance exceeded by from Step 5: £120,935
Carried forward Annual Allowance from Step 6: £50,000
As £120,935 exceeds £50,000 by £70,935, Andy will have to pay tax on this amount at his marginal income tax rate.
Example 1b – Promotion from specialist registrar to consultant (Transition member)
As per example 1a, except let’s now assume Andy transitioned to the 2015 Scheme in April 2017.
Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”:
Pension = £47,132 x 10/80 = £5,892
“Inflation proof” Pension = £5,892 x (1+2%) = £6,010
Lump sum = 3 x £5,892 = £17,676
“Inflation proof” Lump Sum = £17,676 x (1+2%) = £18,030
Step 2: Calculate pension benefit at the end of the current Pension Input Period:
Pension = (£77,913 x 10/80) + (£77,913 x 1/54) = £9,739 + £1,443 = £11,182
Lump sum = 3 x £9,739 = £29,217
Step 3: Calculate increase in pension benefit value over the Pension Input Period:
Pension = (£11,182 - £6,010) x 16 = £82,752
Lump sum = (£29,217 - £18,030) = £11,187
Total change: £82,752 + £11,187= £93,939
Step 4: Calculate threshold income, adjusted income, and Annual Allowance:
As his taxable income is less than £110,000, Andy is not affected by Tapered AA and his Annual Allowance for the year is £40,000
Step 5: Test against Annual Allowance:
Increase in growth from Step 3: £93,939
Annual Allowance from Step 4: £40,000
So, Annual Allowance exceeded by: £93,939 - £40,000 = £53,939
Step 6: Carried forward Annual Allowance from previous 3 years: £50,000 (say)
Step 7: Calculate any tax charge payable:
Amount Annual Allowance exceeded by from Step 5: £53,939
Carried forward Annual Allowance from Step 6: £50,000
As £53,939 exceeds £50,000 by £3,939, Andy will have to pay tax on this amount at his marginal income tax rate.
Example 2a: Senior Consultant (Protected member)
Jack is a Senior Consultant with a salary of £105,042, a Level 8 CEA (£30,160) and is a fully protected member of the 1995 Section of the NHS Pension Scheme. He has been a member of the Scheme for the past 30 years. In the 2017/18 tax year, he is awarded a Level 9 CEA (£36,192) and his earnings therefore increase from £135,202 to £141,234.
Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”:
Pension = £135,202 x 30/80 = £50,701
“Inflation proof” Pension = £50,701 x (1+2%) = £51,715
Lump sum = 3 x £50,701 = £152,103
“Inflation proof” Lump Sum = £152,103 x (1+2%) = £155,145
Step 2: Calculate pension benefit at the end of the current Pension Input Period:
Pension = (£141,234 x 31/80) = £54,728
Lump sum = 3 x £54,728 = £164,184
Step 3: Calculate increase in pension benefit value over the Pension Input Period:
Pension = (£54,728 - £51,715) x 16 = £48,208
Lump sum = (£164,184 - £155,145) = £9,039
Total change: £48,208 + £9,039 = £57,247
Step 4: Calculate employer share of this total increase in value:
Member contributions in the year = 14.5% x £135,202 = £19,604
Employer share of increase in value of pension = £57,247 - £19,604 = £37,643
Step 5: Calculate threshold income, adjusted income, and Annual Allowance:
Threshold Income = £135,202 - £19,604 = £115,598. This is greater than £110,000, so Jack is affected by Tapered AA.
Adjusted Income = £135,202 + £37,643 = £172,845. This is greater than £150,000, so Jack’s annual allowance will be reduced.
Annual Allowance: £40,000 - (£172,845 - £150,000)/2 = £40,000 - £11,423 = £28,577
Step 6: Test against Annual Allowance:
Increase in growth from Step 3: £57,247
Annual Allowance from Step 5: £28,577
So, Annual Allowance exceeded by: £57,247 - £28,577 = £28,670
So, unless Jack has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at his marginal income tax rate.
Example 2b – Senior Consultant (Transition member)
As per example 2a, except let’s now assume Jack transitioned to the 2015 Scheme in April 2017.
Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”:
Pension = £135,202 x 30/80 = £50,701
“Inflation proof” Pension = £50,701 x (1+2%) = £51,715
Lump sum = 3 x £50,701 = £152,103
“Inflation proof” Lump Sum = £152,103 x (1+2%) = £155,145
Step 2: Calculate pension benefit at the end of the current Pension Input Period:
Pension = (£141,234 x 30/80) + (£141,234 x 1/54) = £52,963 + £2,615 = £55,578
Lump sum = 3 x £52,963 = £158,889
Step 3: Calculate increase in pension benefit value over the Pension Input Period:
Pension = (£55,578 - £51,715) x 16 = £61,808
Lump sum = (£158,889 - £155,145) = £3,744
Total change: £61,808 + £3,744 = £65,552
Step 4: Calculate employer share of this total increase in value:
Member contributions in the year = 14.5% x £135,202 = £19,604
Employer share of increase in value of pension = £65,552 - £19,604 = £45,948
Step 5: Calculate threshold income, adjusted income, and Annual Allowance:
Threshold Income = £135,202 - £19,604 = £115,598. This is greater than £110,000, so Jack is affected by Tapered AA.
Adjusted Income = £135,202 + £45,948 = £181,150. This is greater than £150,000, so Jack’s annual allowance will be reduced.
Annual Allowance: £40,000 - (£181,150 - £150,000)/2 = £40,000 - £15,575 = £24,425
Step 6: Test against Annual Allowance:
Increase in growth from Step 3: £65,552
Annual Allowance from Step 5: £24,425
So, Annual Allowance exceeded by: £65,552 - £24,425 = £41,127
So, unless Jack has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at his marginal income tax rate.