Rising number of GPs face pension tax penalty as inflation set to deepen workforce crisis

Soaring inflation could leave thousands more GPs facing steep tax charges on pensions and deepen the workforce crisis at a time when the profession is under intense pressure, accountants have warned.

Coins
GP tax risk (Photo: Peter Dazeley/Getty Images)

The UK rate of inflation based on the consumer prices index (CPI) measure hit 7% earlier this year and is predicted to rise to 10% or beyond by the end of 2022.

Sharp inflation could leave growing numbers of GPs falling foul of the £40,000 annual allowance limit on pension growth, accountants have warned - even if their income is unchanged, or potentially even falling.

Meanwhile, a loophole in the NHS pensions scheme - dubbed the CPI disconnect - means that even if pensions growth in the following year is negative because inflation drops back to a lower figure, GPs will not be able to write off tax charges incurred in 2022/23 against this.

Pension tax

Major problems with GP pension records are a further complicating factor, experts say, with GPs potentially unaware of how hard the charges will hit them until 'a few years from now'. The government admitted earlier this year that pension records for nearly 20,000 GPs were 'in error', meaning doctors will not have access to up-to-date information on their pensions and will not be able to complete annual allowance tax calculations.

The BMA has long called for the NHS pension scheme to be lifted out of the annual allowance charge mechanism - and this demand has been echoed by accountants who believe the government simply did not understand how the tax mechanism would interact with defined benefit schemes such as NHS pensions.

Financial planner and NHS pensions specialist Graham Crossley told GPonline: 'The annual allowance was set up for fat cats on big incomes trying to shelter lots of money via pension tax relief. They didn't understand the implications of how it works in a defined benefit scheme, especially the NHS scheme.

'When they looked at examples of how annual allowance would be applied it looks like no one actually considered working examples of how it would work in the NHS.'

Annual allowance

Health minister Edward Argar suggested in a written response to an MP this year that 'high earners' may find that the 'generosity of the NHS pension scheme means they exceed their annual allowance'.

However, Mr Crossley said it was 'disingenuous' to suggest that only high earners would be affected - and shared via Twitter an example in which an average female GP aged 50-59 working less than full time with income before tax of £53,500 would fall well over the annual allowance threshold.

A GP in this position with a pension worth £25,000 a year would - if CPI hit 8% - end up over the £40,000 pension growth threshold by £7,500, Mr Crossley wrote.

Mr Crossley said that GPs across a broad age range could be caught up in the growing number incurring pension tax penalties for breaching the annual allowance limit.

He warned: 'The issue we have here is that GPs won't know about this for some time because of delays in the way they get their information. They are already aggrieved with how they are being treated just on the current numbers - when you get the 2020/21 numbers, that will annoy a significant number, and then when you get to 2022/23 it will be the straw that broke the camel's back.'

He added: 'It could be significant, the impact on workforce.'

Meanwhile, specialist medical accountant Andy Pow, a director at Mazars, warned that the way inflation interacts with pensions meant he had seen 'sizeable annual allowance growth figures for GPs' in 2021/22 compared with the previous year - and with 2022/23 to be worse.

Mr Pow explained that his wife, a GP partner, had never previously breached the annual allowance threshold but was set to do so in 2021/22 for the first time by a substantial margin. 

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