MPs demand overhaul of 'entire approach to pension tax relief' ahead of budget

MPs have called on chancellor Rishi Sunak to 'urgently reform the entire approach to pension tax relief' - citing concerns over its impact on doctors - as the government prepares to unveil its 2021 budget.

Houses of parliament (Photo: George Clerk/Getty Images)
Houses of parliament (Photo: George Clerk/Getty Images)

Punitive tax on pensions growth has had a significant impact on the medical workforce - with many doctors forced to reduce their working hours or retire early to avoid charges that can cost more than they earn for taking on additional work.

In a report published ahead of the 2021 budget announcement scheduled for 3 March, the House of Commons Treasury committee warned: 'Given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the chancellor should urgently reform the entire approach to pension tax relief.'

The extent of the impact on the medical workforce was made clear in a BMA poll of more than 6,000 GPs and hospital doctors in 2019, which found that that 31% had reduced their hours due solely to pension tax charges. The poll found that 57% were considering early retirement for the same reason.

NHS pensions

GPonline reported last year that numbers of GPs taking early retirement had tripled over the past decade - a rise the BMA has blamed in part on tax charges.

In last year's budget announcement, the chancellor increased the threshold for the pensions annual allowance by £90,000 in a bid to reduce the impact of the pensions 'tax trap', a measure welcomed by doctors' leaders and medical accountants. However, high-earning doctors continue to be affected by heavy tax charges.

Following the threshold increase last year, the BMA said its campaigning for action to ease pressure on doctors had clearly worked - but warned the government should have gone further by backing its proposal of 'removing the annual allowance from defined benefit pension schemes [such as the NHS pension scheme], a proposal also suggested by the government’s own independent advisors, the Office of Tax Simplification'.

Despite calls for a total overhaul of the pension tax system, the government seems unlikely to implement such sweeping change at a time when the economy is reeling from the impact of the pandemic.

GP workforce

Meanwhile, doctors' leaders warned earlier this week that a proposal thought to be under consideration in the current budget round - freezing the pensions lifetime allowance - could cause a 'catastrophic exacerbation' of existing pressures on the NHS workforce.

Specialist medical accountant Andrew Pow of Mazars LLP, told GPonline: 'The Treasury committee report highlights that pension reform is once more firmly on the government's agenda. This may bring benefits in terms of simplification of an overly complicated tax regime.

'At the same time any moves to a flat rate of tax would no doubt reduce tax relief from current levels to all GPs. Wednesday's budget may being more clarity on whether the government wants to use the reduction in pension tax relief as one of its tools in reducing its current budget deficit.'

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