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How the Budget's annual allowance charge is going to affect GPs

Last week, I was moaning about the chancellor's attempt to pretend tax is simple, and to announce simplifications in the Budget which as we suspect, will be anything but.

As if to underline the point, it is now becoming clearer how the annual allowance charge is going to work. Not only is it absurdly complicated but it looks as if a large number of unsuspecting GPs are going to get caught by this.

So what is this annual allowance charge? All taxpayers are now capped on how much they can pay into their pension with a limit of £50,000. If you pay more, the excess is added on to your total income and taxed at your highest rate.

That sounds straightforward, but the first complication is that in order to work out how much a GP has paid into the superannuation scheme; you don’t look at how much the GP has paid in to the superannuation scheme – that would be too simple. Instead, you have to find out the increase in the GP’s projected pension from one year to another, and multiply the increase by 19.

In calculating this annual increase, HMRC has stated that the effect of CPI inflation is to be ignored. Since GPs' pensions increase by dynamisation which is CPI +1.5% we only need to consider the 1.5%  - or so we thought. It now turns out that there are two CPIs to worry about, HMRC’s CPI is 3.1% but the dynamisation CPI is 5.2%. What does this mean?

It means that the CPI increase included in the annual increased pension (which is used to calculate the  x 19 for the annual allowance) is not being offset as intended by the HMRC discount.

Putting this into figures, a GP we were looking at has had his annual allowance value increased by a whopping £17,157 by the mismatch in CPI. Admittedly this is a high earning GP, but it looks as if the effect of this mismatch is going to push a lot of GPs over the £50,000 limit

In fact the rules are so complicated that the Pensions Agency is not going to be able to give GPs the information they need to do these calculations until October 2013 – which is a problem as the tax is payable on these sums in January 2013.

It is hard to think how they could have made this more difficult. So come on Mr Osborne, tax is difficult, messy, unfair and frequently opaque. It is anything but simple.

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