The Government is keen that everyone has an adequate pension when they retire to avoid having to depend on state aid. But it is also keen to limit how much tax people can save and HMRC is not making it easy for GPs to manage pension tax liabilities.
Two new tax limits on pensions came into effect in April 2011 – the lifetime allowance and, more pressingly, the annual allowance. The latter is a £50,000 limit on how much can be paid into a pension in one year. In the case of GPs, the limit is not simply the total of contributions paid into the NHS pension scheme. Because this is a defined benefit scheme, the limit is compared with an inflation-adjusted multiple of the increase in pension in any one year (dynamising uplift).
So for GPs, three factors could affect their NHS pension. Total NHS income for the year is added to the effect of any added years, then a dynamising uplift is applied to career earnings to date. In 2011/12 the dynamising uplift was 6.7% so many GPs are seeing large increases in their pension for 2011/12, often enough to breach the new £50,000 limit.
Whose pension is at risk?
Fortunately many GPs will have sufficient unused allowances from the previous three years to avoid a tax charge. But this will not be the case for everyone. Those at risk of a tax charge include very high-earning GPs, irrespective of age, and full-time GPs over 40 who are buying added years.
Full-time, high-earning GPs over 52 with added years are at very high risk, especially if they are also contributing to a private pension. Checking if a GP is likely to exceed the limits is by no means easy. Ultimately the NHS Pensions Agency will provide the figures for a GP or their accountant to work out if they have exceeded the limit. But the agency will not be ready to provide figures until October 2013, nine months after they have to be submitted for the April 2012 tax return.
HMRC is aware of the difficulties but is not making exceptions for particular groups. HMRC points out that the tax system is based on self-assessment and pays little regard to how hard something is to work out. If a GP has a tax liability arising from exceeding the annual allowance and does not put an entry on the April 2012 tax return, HMRC is likely to charge interest and penalties.
In view of the potential tax hits for many GPs, accountants are doing their best to avoid missing an entry on a tax return that would give rise to a penalty and to advise GPs in advance if they will have extra tax to pay in January 2013. GPs who think they are at high risk of a tax penalty and whose accountants are not already talking to them about this should be raising the issue with them now. If the tax payable is more than £2,000, NHS Pensions should be able to pay the tax on the member’s behalf. Exactly how they propose to do that, and how payment then affects the member’s pension, is not clear.
Bob Senior is the head of medical services at RSM Tenon and chair of the Association of Independent Specialist Medical Accountants