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Pensions tax penalties binned

Dropping the former chancellor's income-based rules to restrict pensions tax relief will significantly benefit high earning GPs. By Simon Pointon

While GPs are worried that the coalition government's public sector pensions review will cut GPs' benefits, at least a tax threat has disappeared.

Former chancellor Alistair Darling had left a time bomb to restrict tax relief on pension contributions that was to apply from April 2011.

GPs with high earnings
These involved restricting tax relief for GPs earning more than £150,000 a year. The NHS Pension Scheme employer's 14 per cent contribution that contractor GPs pay would have counted towards this limit.

But GPs earning more than £130,000 annually, once all private fees and other non-NHS income had been taken into account, were also likely to be caught by the restriction from next April.

In 2010/11, many GPs are outside the 50 per cent tax bracket as they can deduct personal expenses and all superannuation paid. But this might not have been the case in 2011/12, and some GPs had considered channeling income through a limited company to reduce or extinguish the impact.

New proposals
Instead, chancellor George Osborne announced a different approach to restricting pensions tax relief for high earners, which will be put out for consultation. Instead of an income cap, tax relief will be restricted on contributions in excess of £30,000 to £45,000 a year.

The exact limit is to be decided and will probably include the NHS scheme employer's contribution, and it seems that tax relief at the highest rate - 50 per cent for some GPs - will be available. The method to be used is yet to be decided.

However, assuming it is based on actual NHS pension employee and employer contributions at 8.5 and 14 per cent respectively, if the cut off point is £30,000 then any GP with NHS superannuable profits of £133,333 or less would not lose tax relief.

If instead £45,000 is the relief limit, those with superannuable profits of £200,000 or less would not be affected.

Lower tax bracket
Pensionable profits are generally less than contractor GPs' taxable profits so tax relief will still be available to many practitioners even if their taxable profits are higher.

This is good news as it lifts the majority of contractor GPs out of danger of restricted tax relief on pension contributions and so may effectively keep them in the 40 per cent rather than the 50 per cent income tax bracket.

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