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How to avoid three common pension tax traps

Accountant Sean McLernon looks at how GPs can avoid the looming tax hike on pensions

As can be seen the tax rules which impact on GP pensions have and are due to change significantly for some individuals. For those GPs who are likely to be affected, armed with NHS Pension Choices packs and other relevant information, we suggest an initial review of the impact of the allowances changes is jointly undertaken by medical specialist tax and financial advisers, as soon as possible.

Trap 1: Exceeding your annual allowance

From 6 April 2011, GPs have been hit with a significant reduction in the threshold for the amount of pension contributions that are eligible for tax relief, which the Government has reduced from £255,000 to £50,000.

This could have a sizable effect on the tax that GPs pay, unless you take action now, as any excess over the £50k limit will be subject to a tax charge at your marginal rate of tax.

In the NHS Pension Scheme, your contributions are based on the increase in pension benefits over the course of a year, multiplied by a factor of 16. In calculating the growth from one tax year end to the next the opening accrued benefits are adjusted for inflation, using the CPI figure from the previous September.

Also, if, as with the 1995 section of the scheme, a separate lump sum is payable the amount of the lump sum is then added to arrive at the total deemed contributions for the year. Don't forget to include any payments to personal pension schemes as these count as well.

If you expect to exceed your annual allowance, then the first thing we would advise you to do is stop paying or, at least, reduce your level of private pension contributions.

If you are expecting a year of particularly high earnings, then you may be able to take advantage of annual allowance accrued in previous years. Any unused annual allowance from any of the previous three tax years can be added to your allowance for the current year. 


Trap 2: Late issue of pension certificates

You will find a significant stumbling block could be the time it can take to prepare your tax return.

Annual pension certificates are not prepared until after the year's tax return is complete, and this is too late to include in your self-assessed tax return. Pension scheme administrators should automatically issue annual statements if the pension contributions are more than the annual allowance for the tax year; however, they will not be aware of this until the pensionable pay certificate has been submitted and neither will the administrator be aware of any other pensions a GP may have.

From April 2013, requests for annual statements should be processed within three months or by 6 October (whichever is the latest); however, there is actually a 12 month period of grace given to pension schemes for the 2011/2012 year which will no doubt result in the submission of, and tax payments being based on, provisional tax returns for a number of GPs. In actual fact provisional (i.e. estimated) tax returns are expected to become the norm in future years.

All these delays mean that you may not know if you have exceeded the annual allowance until you get a large bill due on 31 January 2013. By then it will be too late to make any changes to your contributions to avoid the charge. However, there is still one option available to you.

If the tax liability exceeds £2,000, then you can ask the NHS Pension Scheme administrator to settle the tax liability. This would mean your benefits in the NHS Pension Scheme would be reduced, but it could be a good last-ditch option if you do not want to pay the charge.


Trap 3: Breaching your lifetime allowance

GPs also have a lifetime allowance on the tax relief they can receive pensions. This is currently £1.8 million but is due to drop to £1.5 million from 6 April 2012.

If you exceed this limit – and we have more and more GP clients that do - then there is a tax charge on the excess, when drawn. If the GP's benefits are taken as a lump sum the penalty charge is 55% whereas on the pension itself the charge is 25%. The two are effectively the same because the pension income is also subject to income tax.

For members of the 1995 section, this is calculated by multiplying the pensionable pay by 20 and then adding on the pension commencement lump sum. If a GP has other private pensions, any accumulated sums are also added. Roughly speaking, if you have accrued NHS pension of just over £65,000 per annum, you will exceed the forthcoming LTA limit of £1.5 million.

If you think this is going to affect you, then you have two options. Members of the NHS Pension Scheme can apply to HMRC, before 6 April 2012, for ‘fixed protection' or you can choose a greater commencement lump sum.

Fixed protection allows you to maintain a personal lifetime allowance of £1.8 million; however, there is a cost to doing this. After applying for fixed protection you will not gain any further benefits from your pension and further contributions into money purchase arrangements are not possible. Some GPs will already have either primary protection or enhanced protection – if so, you are not also allowed to apply for fixed protection.

Choosing a greater commencement lump sum is an option under the 1995 section, subject to limits. But you will have to forgo an annual pension and this reduces the overall capital value of the benefits.

A number of our GP clients are planning to take their entire NHS Pension Scheme and other pension benefits before 5 April 2012, to avoid the reduction in the lifetime allowance. This is not an option for many GPs, but when linked to 24-hour retirement, assuming it is possible under the terms of the Partnership Agreement or NHS contract, if the GP continues to earn at the same rate as before drawing his pension his total taxable earnings will increase significantly and therefore his tax liabilities. Considered and early advice should therefore be sought.



Tom is a 58 year old GP who has been advised that the amount of his NHS Pension at 1 April 2011 is £56,000 per annum and it is expected by 31 March 2012 his annual pension will increase to £61,000.

The value of Tom's annual pension at the start of the period is multiplied by 16 and added to this is three times the lump sum, giving £1,064,000 in total. This £1,064,000 is uplifted by the CPI figure from the previous September, say 3%, to arrive at £1,095,920.

The amount of the annual pension at 31 March 2012, being £61,000, is also multiplied by 16 and the commencement lump sum is then added, to arrive at £1,159,000. The uplifted figure is then deducted from the result to give a total notional annual contribution of £63,080 (1,159,000 – 1,095,920) - above the annual allowance of £50k.

Tom is heading for a large tax bill unless he can bring forward any unused allowance from the previous three years.

Assuming that he has no unused allowances to carry forward Tom will pay tax at his highest marginal rate on the excess amount over and above the £50,000 annual allowance with the tax due on 31 January 2013. In this example Tom is facing a potential tax charge of £6,540 (£63,080 - £50,000) x 50%.

SeanMcLernon is a director of medical services at RSM Tenon



  1. HM Revenue & Customs – Pensions ( )
  2. NHS Pensions Agency ( )
  3. Consumer Prices Index ( )
  4. BMA  ( )


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