For higher earning GPs, the ability to build up their pension is subject to two restrictions. The Annual Allowance (AA) restricts the amount a person can contribute into a pension during a particular year and the Life Time Allowance (LTA) seeks to caps the size of the fund that can accrue tax-free during your lifetime.

Although private sector workers caught within the restrictions can control their pension contributions, public sector workers usually cannot as their employers will continue to contribute based on their earnings. Historically, the only way high earning public sector workers (such as senior NHS staff) are able limit their exposure to AA and LTA charges is by restricting their earnings by choosing to work less, undertaking opt in and opt outs during the year to reduce their profits subject to pension, or retire.

In the Budget, the Chancellor announced the abolition of the LTA and the raising of the limits for the AA to "help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns".
 

Annual allowance change

Where pension contributions for a year exceed the AA, the excess is subject  to charge at the persons marginal rate of income tax. The available AA is also tapered by £1 for each £2 adjusted income exceeds a defined limit.

From 6 April 2023, not only will the AA will increase from £40,000 to £60,000, the adjusted income limit will increase from £240,000 to £260,000 – making tapering less likely. And where tapering does apply, the minimum tapered AA will be £10,000, up from £4,000.

Where a public sector worker is a member of both a closed and an open pension scheme they will be linked and the combined pension income will be calculated as if it were a single scheme. This enables the offset of any negative real growth in legacy public sector schemes when calculating the AA.
 

Lifetime allowance changes

On a 'benefit crystalising event' (e.g., first accessing pension income or 75th birthday), pension funds are tested and, if their value exceeds the LTA (currently £1.07m), the excess is subject to a tax charge. To the extent the excess is taken from the pension as a lump sum, the tax is charged at a rate of 55%. Where the excess remains in the pension fund it will be taxed at 25% (recognising that it will subsequently be subject to PAYE on draw down).

From 6 April 2023 the LTA charge will be removed – it will be formerly abolished in a later Finance Act. The LTA limit will, however, continue to exist for the purpose of capping the 25% tax-free lump sum which means that for most people the maximum tax-free lump sum they could accrue will be £268,275 – no matter how big their fund is. For those who hold pension protection of their LTA, the maximum lump sum is 25% of the protected amount.
 

Impact on GPs

Any GP thinking of accessing their pension before 6 April 2023 should seek expert advice as a slight delay may prove cost-effective. In other cases, while this change will remove some immediate concerns over pension taxes for GPs it is interesting to note that the Shadow Chancellor has committed to re-introducing the LTA. In the short term, we would expect the new rules may lead to changes in widely used pension withdrawal strategies and we note that there has not yet been any change to the treatment of pensions for inheritance tax purposes.

For help and advice on the tax issues relation to your pension please get in touch with our team.