GPs could face huge tax bill as inflation pushes pension pots over annual limits
Tax bills for high-earning GPs could be driven even higher as a result of inflation figures due this month which could see pension pots grow at a time when planned ‘tapering’ down of the annual tax allowance begins to bite.
GPs with large pension pots who are still working close to full-time in a high earning practice could see the majority of their pension growth taxed when they settle their tax bill early next year.
Changes to the annual allowance on pension contributions that took effect in April 2016 mean that GPs with a gross income in excess of £150,000 from all sources, including pension growth, have their £40,000 allowance 'tapered' down.
GPs should have been planning for this to bite in 2018 but accountants are now warning that current inflation, based on September’s Consumer Price Index, is likely to be at least double the previous year's.
While this means GP pension growth will be greater, it will also see more high earners pushed above the £150,000 income threshold and see their pensionable annual allowance reduced incrementally leaving them liable for income tax on contributions above this.
For anyone with an income in excess of £210,000 the allowance tapers to a minimum of £10,000.
Accountants said this would be a ‘real killer’ for the long-serving, high earning GPs with a significant pension pot already built up, but said a ‘significant proportion’ of GPs would see some impact.
Bob Senior, medical services lead at accountancy firm RSMUK, told Pulse: ‘The £150,000 [annual allowance] is based upon income from all sources: GP, part-time gardener, buy-to-let.
‘So it’s gross income from all sources before any pensions deductions, it also includes the growth in the pension over and above their contributions.’
‘A significant proportion of GPs are breaching that £150k, particularly towards the back-end of their careers when they’ve got quite big pension pots built up.’
CPI in September 2016 was 1% but at the most recent value this year, in July, it stood at 2.6%.
Mr Senior told Pulse: 'I would not be surprised to see it coming in a bit below the 2.6% in September, 2% is what was expected but it will be clear within a couple of weeks.'
This faster growth in their pension would be a boost for most GPs, as their income or total pension pot isn’t significantly big to reach allowance limits.
But he added: ‘There’s a significant proportion who are in the back end of their career and their pension is already quite significant, where an extra 1-1.5% on that, all of a sudden it’s quite a big number.
‘And where it’s a real killer it’s because of the gross income, they’re losing some of the allowance [through tapering] and they’re caught from both ends.’
Though he didn’t want to speculate on actual numbers that might be affected, Mr Senior said there are high-earning practices where the partners’ annual income is above £210,000 and would see the maximum tapering reduction.
In those cases the growth in their pension for annual allowance purposes ‘could easily be £65,000' according to Mr Senior and assuming they have no unused tax relief to bring forward this would amount to '£55,000 of taxable earnings above the tapered allowance.’
He said: ‘These bills can be big, and if it’s been brought about by a reduction in the annual allowance then the pension agency won’t help.’
But GP pension leads at the BMA told Pulse that despite this year’s impact tapering remains ‘minor sport’ compared to the overall impact of lifetime and annual pension contribution limits on the profession.
Dr David Bailey is pension lead for the GP Committee and he told Pulse: ‘The tapering only applies if you’re on more than £150,000 a year, which is certainly the significant minority of GPs if you look at the average taxable income for GPs across the UK.
‘But yes, it will be an issue for those small numbers of people.'
He said those GPs would want to think very carefully about staying in the NHS pension scheme but added: 'The bigger issue is the annual allowance as it stands, and the lifetime allowance for doctors. That’s a much bigger issue than the relatively minor sport of GPs earning over £150k.'