An average GP could be hit by a £33k tax bill due to the ‘unfair’ way inflation is applied to their pension, GP pension experts have warned.
It has led to warnings from the BMA and medical accountants that this could lead to GPs retiring early or reducing the number of sessions they work, exacerbating the current workforce problems.
To help GPs navigate the ‘unfair’ potential tax charges and make informed decisions for the future, the BMA has launched a pensions tool.
The issue relates to tax-free annual allowance (AA) charges, which apply when an individual’s pension grows by more than the maximum amount of tax-free growth in one year – the standard AA currently stands at £40,000, but this is adjusted based on total income.
However, an ‘anomaly’ in the legislation means that the way HMRC calculates the increase in the value of an individual’s pension is based on ‘pseudo-growth’ – meaning that doctors are potentially going to be charged on ‘a benefit they will never actually receive’, as the BMA put it.
The BMA refers to HMRC’s measure as ‘deemed pension growth’, which is based on the previous year’s inflation rate measured via the Consumer Prices Index (CPI). This rose to 9% in April, according to the latest data from the Office for National Statistics (ONS).
However, individuals’ pensions will not actually grow by 9%. The BMA said: ‘If inflation stabilises next year as predicted, those who have already faced these unfair penalties this year that were based on “artificial” pension growth will see this growth largely disappear and hence will have been taxed on a benefit that they will never actually receive.’
Dr Tony Golstone, who is the BMA national clinician advisor on pay, and the pensions and pensions committee deputy chair, has said that the GP tool would show that a ‘typical GP’ could see an AA charge that is ‘almost half of their post-tax income’.
He said: ‘If September CPI is 10%, that might give a typical GP around the level of the lifetime allowance [ie, those towards the end of their careers] and with average earnings of £115k an AA charge of £33,349 – that’s almost half of their post-tax income.’
But he added that in this scenario the GP would have been ‘overcharged by £24,276’ because ‘when CPI goes up, Government cashes in on false “pseudo-growth” of your pension and when it comes back down, to say 3%, and your “growth” is negative – they zero that off’.
Dr Goldstone said the BMA pensions committee would take ‘urgent advice’ on what the Government ‘will need to do to mitigate against an exodus’.
BMA guidance accompanying its new pensions tool has said GPs should prepare for a large AA tax charge, if the rules are not changed. It also warned some will consider reducing pensionable pay or retiring earlier than they would have done to reduce pension input during this period.
Dr Goldstone said the BMA has met with the Government but stressed that action is ‘urgently’ needed ‘.
He added: ‘It’s the BMA’s view that [the] toxic combination of using different CPIs for each tax year, and then ignoring “negative growth”, is allowing them to destroy your pension.
‘It’s tantamount to “pension theft”.’
The Association of Independent Specialist Medical Accountants (AISMA) has also written to the Treasury calling for action to avert the huge tax bills.
It warned of ‘mounting concern within the medical profession over perceived unfairness in the annual allowance tax’ that could see GPs ‘landed with punitive tax charges due to the current steep rise in inflation’.
This ‘could lead to GPs either reducing sessions or leaving the NHS’, it also warned.
AISMA’s letter to the Treasury 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 that average earning GPs could end up facing ‘high’ tax bills ‘simply due to inflation, which was never intended by the legislation’.
And some ‘may decide to bring forward retirement’ because ‘in many cases’, they will exceed their £40,000 threshold allowance available ‘simply due to the disconnect between the way inflation figures are calculated’, it said.
‘Whilst GP numbers may not fall, the unintended consequence will be a reduction in the sessions they choose to work,’ it added.
A ‘big issue’ for GPs
NHS pension specialist adviser at Quilter Graham Crossley told Pulse the problem is ‘one of the big issues for GPs at the moment’.
He added that while GPs will face a ‘big bill for last year’, they will face a huge bill for this year. And because of delays to pension statements, GPs ‘don’t find out until well after the event’ and won’t ‘get this type of information for another couple of years’, he added.
A change in the law to create a ‘fairer mechanism’ for annual allowance calculations – so the rate of inflation that is used to increase pension benefits is the same as that used to adjust the opening value – would be a quick fix, Mr Crossley said.
‘But with doing nothing, if they think they’ve got workforce problem now, just wait until these annual allowance statements start landing on GPs’ desks,’ he added.