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Majority of full-time GPs to be hit with pension tax bills of up to £60,000

GPs face higher tax bills on their pensions after chancellor George Osborne announced in yesterday’s Budget that the lifetime allowance for tax-free pension savings was to be reduced from £1.25m to £1m.

The BMA warned lowering the cap on tax-free savings further would now put most full-time GPs in line for a hefty tax bill when they retire and mean they may be better off stopping contributions before they reach their original planned retirement age.

It comes after Pulse revealed many more GPs are already contemplating opting out of the NHS scheme because of changes meaning they have to work longer, until 67 or 68, or lose certain benefits.

The chancellor’s announcement was made as one of a range of measures to ensure ‘fairness’ in how society contributes to cutting the deficit.

The Budget documents state that the Government is ‘restricting the lifetime allowance for pensions tax relief to £1 million from April 2016 and indexing it by inflation from 2018 so that everyone contributes their fair share to reducing the deficit’.

According to accountants, the reduction in the lifetime allowance means the maximum tax-free lump sum GPs can take on retirement will go down from £163,043 to £130,435, and the maximum they will be able draw tax-free is going to fall from £54,348 to £43,478.

At the top end of the scale, a GP with a £1.5m pension pot could end up paying around £60,000 in tax over 20 years, or £3,000 a year.

Dr David Bailey, deputy chair of the BMA pensions committee, told Pulse the change was ‘going to bring in the vast majority of retiring GPs. It has a double significance for GPs because we pay the employers’ contributions as well as employee’.

He added: ‘People will be thinking seriously about whether they need to take fixed protection to maintain their lifetime allowance at the higher level before the new one comes in in 2016.’

Luke Bennett, partner at Francis Clark LLP, told Pulse GPs with pensions already worth more than £1m might be protected from the change and that the plan to increase the allowance with inflation from 2018 was ‘helpful’, but he agreed GPs reaching retirement would be likely to decide to leave the NHS scheme – leading to a rise in contributions.

Mr Bennett said: ‘Although the details haven’t yet been announced, I expect that it will give some relief for those GPs who have pension funds (NHS plus any private) worth more than £1m on 5 April 2016.

‘In my view the reduction in lifetime allowance is going to lead to more GPs deciding to stop paying into the NHS pension scheme prior to retirement, as they will be reluctant to build up pension benefits in excess of the lifetime allowance.’

He added: ‘If high earners stop paying in, and take their benefits early, the contributions needed from those remaining in the scheme will have to increase to cover the shortfall.’

Paul Samrah, a medical accountant with Kingston Smith, said GPs should check the value of their schemes.

He said: ‘It’s going to bring a lot more GPs into the “net” – they need to be very much aware of it, not just assume that they’re immune from it and that this only applies to private pensions. They should be checking the value of their scheme.’