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Practice managers who are partners could face ‘huge’ pension tax bill

by Beth Gault
13 July 2022

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Practice managers who are higher earners or partners could be hit with a large pension-related tax bill after the Treasury rejected calls to take action to prevent it.  

Pension experts previously warned that high earning NHS workers, including GPs, could face a £33k tax bill due to the way that inflation is applied to their pension.  

In a letter to the Treasury in May, the Association of Independent Specialist Medical Accountants (AISMA) asked for a repeat of the 2019/20 compensation scheme to protect NHS staff from tax penalties on their pension growth so they would be free to work at maximum capacity (see box below).

It also called for an amendment to the inflation measurement for NHS workers so that they could be taxed fairer but would also allow for better forecasting.

In its letter, AISMA said: ‘The likely scenario is that there will be high pension growth in 2021/22 and 2022/23, followed by negative growth in 2023/24.  

‘This means GPs will be taxed heavily in the two earlier years but will receive no relief for the third year.’ 

It added: ‘GPs could well end up paying tax simply due to inflation which was never intended by the legislation.’

However, the Treasury sent a letter in response that said that the ‘Government is not minded to replicate this scheme at present’ and that its system of calculating the annual allowance ‘ensures that defined benefit pensions keep pace with inflation and make these schemes some of the most generous pension provision available’.

Partners could be affected

The lack of replication of this scheme will likely mean GPs will face tax bills of up to five-figures, according to Andrew Pow, director at accountancy firm Mazars and member of the board at the AISMA.

But practice managers who are partners at their practice could also face tax penalties.

‘Higher earning people in the NHS are affected,’ said Mr Pow. ‘It’s less likely to impact on your employed practice manager, but anyone who’s a practice manager partner might be affected.’

The impact will also depend on how much pension an NHS employee has built up.

‘The older you are, the more likely that you’re going to be affected, so younger GPs might be okay. It really is a combination of how much pension you’ve built up over the years and how much you earn,’ said Mr Pow.

Likely impact

As AISMA has previously warned, the tax bills could reduce the number of sessions that GPs work and could mean some choose to retire early.

‘This issue is driving behaviour and it will result in fewer people actually wanting to work, which will impact practices as they will have a smaller pool of resources,’ said Mr Pow.

However, some practices may need to alter the amount they pay their doctors in order to account for the increasing tax bills, according to Mr Pow.

‘Some practices will hold back money to help pay the doctors’ tax bills, so practice managers who do this need to be aware that there might be a sizeable extra tax bill and they need to take action now,’ added Mr Pow, who said between 10-20% of practices do this on his firm’s books.

It comes after the BMA was granted a judicial review into the Government’s ‘unlawful’ handling of NHS pensions last week.

What is the annual allowance compensation scheme?

Under the current NHS pension scheme, the highest-earning GPs pay at least 14.5% in contributions, but a tapered annual allowance limits the amount of money that can go into the pension pot each year without facing significant tax penalties. 

The pensions taxation rules, in particular around annual and lifetime allowances, push GPs to reduce their hours or retire early to avoid large tax bills.

But for the 2019/20 tax year, GPs facing a tax charge over the pension savings annual allowance threshold can have this charge paid by the NHS pension scheme by filling in and returning a scheme pays election and a compensation form

To access the compensation, GPs will use the ‘scheme pays’ arrangement already available to NHS pension scheme members, which usually allows tax charges to be deferred until retirement.

GPs are required to submit a ‘scheme pays’ election to NHS Pensions before they can submit a claim for the compensation to Primary Care Support England (PCSE).

The Government made the compensation available in 2019 to allow clinicians to take on more shifts or sessions without worrying about an annual allowance charge on their pensions.