- Posted Monday November 5, 2018
A very welcome change to the rules around the NHS pension scheme will negate the need for thousands of doctors to cover annual five-figure tax bills.
The change relates to the tax relief available on the annual allowance for pension contributions, which, for the 2016/17 tax year, was £40,000. For GPs and consultants earning more than £110,000, this relief can taper down to as low as £10,000.
Practitioners in the NHS scheme could, in 2016/17, have the tax due on anything over the standard £40,000 allowance paid from funds they'd put into the pension scheme. However, any tax below it could not be paid in such a way and had to be met from funds elsewhere.
Relieving pressure on practice finances
In practice, this meant that doctors earning more than £110,000 had to find the money to cover the tax due on £30,000 of income - the difference between the standard and the minimum allowances.
While the rules allow for allowances to be rolled over from one year to the next, any practitioners without any unused allowances were left with an immediate £13,500 tax bill (ie, 45% of the £30,000).
As you might imagine, this caused much shock and anguish for many GPs, especially where it was unexpected, and will have put extra pressure on the cashflow and already-stretched finances of their practices.
But now, after a successful lobbying campaign by the BMA, health secretary Matt Hancock has announced that the 'scheme pays' option is being extended to address this issue. This means that doctors will be able to ask for tax on pensions for the 2017/18 financial year to be covered in full from their scheme assets if they don't have the funds available or don't want to pay the bill directly.
The key to striking a balance
Choosing this option will, of course, impact on the final benefits that practitioners receive from their pension fund when the time comes, and a balance needs to be struck between an individual's immediate and long-term financial needs.
It's estimated that up to one in five GPs will be able to take advantage of the change in the pension scheme rules, and it makes clear sense for each of them to take specialist tax planning advice which can help identify what the best options are for their personal situations.
Richard Humphreys is director at RMT Healthcare, the specialist medical division of Newcastle-based RMT Accountants & Business Advisors. For further information on this topic, please contact Richard Humphreys at RMT Healthcare on 0191 256 9500.