GPs nearing retirement could be faced with a tax bill worth tens of thousands of pounds - because the BMA won its judicial review against the government's pension cap.
Last month a High Court judge found that then health secretary Patricia Hewitt acted illegally when she retrospectively capped GP pensions in 2006. If his ruling were implemented, the BMA expects the change to add 10 per cent to GPs' pension pots.
Steve Caps, from specialist medical accountants Ramsay Brown, warned that GPs who gain from this change could find their pension funds pushed over the tax-free allowance.
'I've got clients who aren't making any more personal pension contributions because of this,' he said.
Under rules introduced two years ago, pension funds are tax free if they were worth less than £1.5 million on 5 April 2006. This translates to an annual pension of around £65,000.
But above that allowance they are taxed at a rate of 55 per cent. So a GP who finds that, thanks to the ruling, their pension was worth £1.6 million in April 2006 will now face a £55,000 tax bill (55 per cent tax on £100,000).
GPs have until April 2009 to apply for protection from the tax. However, they cannot do so until the value of their pensions is settled. If the government lodges a lengthy appeal, GPs could thus find they run out of time in which to limit their tax liability.
Mr Caps said that any retired or near-retired GP with an NHS pension previously worth over £55,000 a year could be liable for the tax. This could be as many as 5 per cent of GPs.
But he warned that private pension arrangements also count towards the allowance, meaning that GPs with much smaller pensions could also be caught out.
John Ford, head of health policy at the BMA, said that only the top-earning GPs would be likely to exceed the allowance.
'The overall benefits of the judgment will exceed the tax implications,' he added.
Mr Caps also warned that the government could find a way to cap the pensions of GPs who are still working.
Tax on pensions
- Tax is based on pension pot value on 5 April 2006.
- You are allowed to have up to £1.5 million in the pot tax free. But above that you will be charged at a rate of 55 per cent.
- A GP whose pension fund was worth £1.7 million on that date would owe 55 per cent of £200,000, i.e. £110,000.
Source: Ramsay Brown
Comment below and tell us what you think