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Pension tax charges update

23 July 2019

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It is not often you hear pension schemes discussed in the headlines but tax charges on the pensions of GPs and NHS consultants are now a controversial topic.

With information about annual allowance growth for 2017/18 soon to be available for GPs it is important that the growth figures for 2017/18 are reviewed early to consider tax charges arising and GPs being aware of their individual reporting requirements.

As a reminder, an individual is entitled to a £40,000 annual allowance which means tax relief is available on growth up to £40,000 in the tax year. If growth exceeds the allowance, a tax charge will arise on the excess growth at the GPs marginal rate of tax unless there is sufficient unused relief in the previous three years that covers the excess. With two consecutive years of increased inflation, the growth in pension benefits has meant that many GPs exceeded their annual allowance in 2016/17 and either used all of their unused relief resulting in a 2016/17 tax charge or utilised a large proportion of unused relief with little to carry forward against 2017/18. This means there will be higher tax liabilities in 2017/18 for many GPs.

However, not every individual is entitled to a £40,000 annual allowance. Where an individual’s threshold income exceeds £110,000 there is a second test which may reduce the allowance to a minimum of £10,000. Therefore, knowing your threshold income is very important. If your threshold income rises just over £110,000, a minimum £10,000 allowance may apply so a review of your positon is vital. The types of issues to consider are:

  • Maximising personal expenses claims
  • Ensuring that all information is actual and not including estimated information, e.g. estimating bank interest on the tax return at £200 when actually the number may be lower
  • Considering additional unpaid leave if income is expected to be close to the £110,000 threshold, e.g. if one week extra holiday was taken how would this affect your threshold income?

We are having regular conversations with our GP clients and many are looking at opting into the NHS pension scheme for only part of the year or looking at different investment options where an individual considers their pension benefits are already sufficient etc. If GPs are in both the 'officer and practitioner schemes, they can choose to opt out of one or both schemes. All of these points have an impact on the growth in the scheme and the tax liabilities that can arise.

In June, the government outlined proposals to allow senior clinicians to halve their pension contributions to avoid significant tax charges. Currently, GPs cannot control their pensionable income without opting out of the scheme and this has resulted in significant tax charges for many GPs - leading to many taking early retirement or reducing clinician hours.

As always, for pension issue it is important to seek advice from an IFA about the impact of any course of action on your pension benefits. For help and advice on your tax position please get in touch with our team.