Even low-earning GPs face pension penalties in perfect storm for workforce

GPs across the earnings spectrum face pension tax penalties because of rising inflation in a major threat to the workforce - but government ministers' comments suggest they are failing to grasp the scale of the problem, experts have warned.

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(Photo: Mario Gutiérrez/Getty Images)

Responses from government ministers to questions about the potential impact of pensions tax on the NHS workforce have suggested only the highest earners will be affected.

But tax experts say this is far from the truth - warning that 'many more' GPs will face tax penalties, with examples suggesting even GPs working less than full time and earning just over £50,000 a year before tax could breach the annual allowance for pension growth in 2022/23 as inflation rises.

The fact that GPs across the earnings spectrum could be hit by significant pension tax penalties risks driving more doctors out of the profession at a time when the GP workforce is already in decline - and facing a string of pressures that could exacerbate the problem.

NHS pensions

Numbers of people claiming their NHS pension hit record levels last month, and BMA polling shows that a third of GPs are planning to retire early.

This is a major concern at a time when the NHS is more reliant than ever on older GPs - with close to a quarter of fully qualified, full-time equivalent GPs now aged over 55.

However, tax experts have questioned whether government ministers - including health and social care secretary Sajid Javid - have fully grasped the scale of the problem.

Responding to a parliamentary question in April about the impact on NHS staffing and retention of the £40,000 tax limit on pension growth, health minister Edward Argar said that 'the highest earners within the NHS will find that the generosity of the NHS Pension Scheme means they exceed their annual allowance'.

High earners

On 7 June, giving evidence to a health and social care select committee inquiry, Mr Javid again appeared to suggest that only high earners were affected.

Asked what his understanding of 'the pension issue' for doctors was, the health and social care secretary said that the 'taper issue has historically been the biggest issue'. He pointed out that the government had in 2020 increased to £200,000 the income threshold at which pension tax allowances could be tapered down - meaning that an estimated 96% of doctors were no longer in line to see their full annual allowance of £40,000 reduced.

Mr Javid said the government was 'looking at further flexibilities' - but added: 'One thing that does play on my mind - when you are talking about senior doctors, some of the highest paid not just in the NHS but in society. Anyone earning over £200,000 is in the top 1%, 2% of the highest paid in society. in terms of workforce and paying fairly for the NHS workforce, there's a lot of demands on the budget.

'And while it is right to think about what changes might be necessary for some of the highest earners to create the right incentives, I also want to make sure it's well balanced.'

Tax charge

But specialist medical accountant Andrew Pow, a healthcare director at Mazars, told GPonline that changing the threshold for the annual allowance taper was 'entirely different from removing 96% from a tax charge'.

He said that many doctors who were nowhere near being among the highest earners would still exceed the £40,000 annual allowance for pension growth - warning that in 2021/22 and 2022/23 'many more than normal will get caught'.

Mr Pow explained: 'Essentially for 2022/23 HMRC will allow an uplift of 3.1% in the historic benefits accrued before measuring the growth - using the September 2021 CPI rate - but NHS pensions will be uplifted using the CPI figure in September 2022.

'So if that’s 10%, there is automatically a taxable growth of 6.9% in inflation. If someone has accrued a pension of say £30,000 – then the growth is 19 x £30,000 x 6.9% simply due to inflation - i.e. £39,330 – so all the allowance is eaten up by inflation. A GP in this scenario wouldn’t need to earn much to then have annual allowance tax to pay.

'Its difficult to say exact numbers on who is impacted - but the general rule will be the older you are, having accrued a bigger pension, the more the inflation disconnect hits you. And that’s the group the NHS needs to retain as much as possible rather than have them retire early. It will also impact on people say working out-of-hours on top of their GP practice work - as any additional income is likely to be in the band where the £40,000 growth is already used up.'

GPonline reported last month on an example quoted by an NHS pension specialist who said it was 'disingenuous' to suggest that only high earners would be affected by pension tax penalties - quoting an example in which an average female GP aged 50-59 working less than full time with income before tax of £53,500 and a pension worth £25,000 a year would fall well over the annual allowance threshold.

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