The Department of Health announced today (7 August 2019) that they will be consulting over a new set of proposals which will give high earning doctors subject to the Annual Allowance Charge flexibility over the amount they put into their pensions. The proposal is that the same percentage of income chosen to be pensioned will be applied to the accrual rate.

This replaces the 50:50 proposal which went out for consultation in July.

The new proposal allow doctors to set the exact level of pension accrual at the start of the year. The example given is that choosing to have 30% of pensionable income actually pensioned, will result in having the accrual rate reduced to 30%.

For Example, a GP with pensionable earnings of £120,000  in the 1995 Pension Scheme would usually contribute  28.88% for employees and employers superannuation ie £34,656 (subject to tax relief depending on the effect of the taper), in return for an annual pension of £1,680 and a lump sum of £5,040. If that same GP chose to pension just 30% of their pensionable income, the cost would reduce to £8,345 (subject to tax relief depending on the effect of the taper) in return for an annual pension of £504 and a lump sum of £1,512.

The announcement states that employers would have the option to recycle the unused contributions back into the doctor’s salary.

While this is to be welcomed as it gives the doctor some choice over the amount of pension contribution, there are some immediate issues that come to mind:

  • The percentage of pension to be chosen by the doctor has to be made at the beginning of the year – GPs won’t know their profits until after the end of the year, so some guesswork will be needed.
  • Why would the employer have the option to recycle the unused pension contributions back into the doctors salary? This should happen automatically.
  • Presumably the recycled money will be subject to income tax in the usual way, so what would have been at some time considered tax deductible pension contributions will now be split into part that is tax deductible and part that is taxable
  • The recycling of the income will actually increase the effect of the taper by increasing the income of the doctor exposing them to the taper limits

This article was written by Laurence Slavin, a partner with chartered accountants Ramsay Brown LLP who specialise in the finances of Doctors and can be contacted at laurence@ramsaybrown.com or 020 8370 7710. Ramsay Brown LLP are also members of the Association of Independent Speciaslist Medical Accountants (AISMA)

This article has been produced from information available at the time of the release of the announcement, and should not be relied upon for making decision without consultation with a professional adviser