Budget brings GPs some good news

Chancellor Rishi Sunak’s first Budget at least brought GPs some financial relief in this turbulent year.


Annual Allowance (AA)

Things should be getting better for GPs affected by tough pension issues following the ‘tapered’ AA introduction in April 2017.

This was when the standard AA – the annual amount of tax relief an individual can receive on their pension contributions or growth – of £40,000 started to be ‘tapered’ downwards depending on an individual’s earnings level.

The impact did not really hit home for many until their additional tax charges in January 2019, the deadline for 2017-18 tax returns.

This led to doctors considering their NHS pension membership options and many started looking at reducing their working hours or leaving the NHS Pension Scheme in a bid to try to mitigate additional tax charges.

Thankfully the Chancellor announced that from April 2020 the thresholds determining the tapering of the AA would be significantly increased.

  2019-20 2020-21
  £ £
Threshold income £110,000 £200,000
Adjusted income £150,000 £240,000

Threshold income is taxable income after the deduction of personal expenses and pension contributions. Adjusted income is essentially threshold income plus pension growth.

So for 2020-21 onwards, if your threshold income exceeds £200,000 and your adjusted income is over £240,000, your AA is reduced by £1 for every £2 that adjusted income exceeds £240,000.

Despite the good news for GPs and consultants, the Government announced that the minimum AA will drop from £10,000 to £4,000. Those with adjusted total income exceeding £312,000 will have this minimum limit.

There are a couple of ‘buts’ to add here as ‘income’ includes all taxable income from all sources, not just from the NHS. 

While there is no change to this definition from previously, it does mean that clinicians who earn a more modest NHS income, but have significant private wealth or other sources of income, may not feel the full benefit. 

A comparison of the annual allowance under the old and new rules is shown below:

  2019/20 AA 2020/21 AA
Adjusted income £ £
£150,000 40,000 40,000
£175,000 27,500 40,000
£200,000 15,000 40,000
£225,000 10,000 40,000
£250,000 10,000 35,000
£275,000 10,000 22,500
£300,000 10,000 10,000
£325,000 10,000 4,000

This change should now see most GPs and consultants securing the full £40,000 AA.

The annual allowance limit of £40,000 will still affect many pension scheme members, even if they are no longer affected by tapering.

Consider a GP with 2015 NHS Pension Scheme membership and pensionable income of £135,000. Their pension will rise by 1/54th of their pensionable income, so £2,500. Multiplying this by 16 to arrive at the deemed pension growth takes the GP up to the pension limit of £40,000.

However the pension growth calculation must also consider the revaluation of all previous earnings, whether in the 1995-2008 or 2015 Scheme. As revaluation within these schemes is set at 1.5% above inflation, this will add to the deemed pension growth in the year.

It is impossible to generalise as everyone’s situation differs but a clinician in their 50s could easily find £10,000 of their annual allowance used up by the growth relating to earlier years.

The issue regarding the accessibility of pension information still remains and despite PCSE appearing to be more proactive in recent months, many GPs still find it extremely difficult to get up to date pension information.

There will still be a delay in determining the true extent of any additional tax charges until this improves.

For those NHS Pension Scheme members who have deferred their membership to reduce their exposure to additional tax charges, now may be the time to look at opting back in. Doing so will also give members access to any unused AAs from the previous three tax years, as well as the limit for the current year.

Lifetime Allowance (LTA)

The Budget made no fundamental changes to the LTA (the maximum pension value before additional tax charges arise) other than an inflationary increase from £1,055,000 to £1,073,100.

It is disappointing that the AA is not also inflation linked.

Entrepreneurs’ relief

Boris Johnson announced he would review Entrepreneurs’ relief (ER) in last year’s Conservative manifesto.  Simplistically, ER reduces the Capital Gains Tax rate on qualifying capital gains to just 10%, as opposed to the more mainstream rate of 20% for higher rate taxpayers.

Individuals were also entitled to a lifetime allowance of £10m meaning all eligible gains up to this limit would still attract the more favourable tax rate.

True to pre-Budget rumours, the lifetime limit was cut from £10m down to just £1m. This change is most likely to impact owners of larger businesses and therefore GPs are unlikely to see much change to the tax rate paid on capital gains – unless a gain in excess of £1m is realised on the eventual retirement of a partner from their practice. That is not very likely, you might think.

There may also be instances where GPs and hospital consultants own shares in limited companies which are used as vehicles to receive any private income. A gain on the disposal of these shares (up to the £1m limit) will qualify for ER relief providing these conditions are met:

*At least 5% of the ordinary share capital is owned, including 5% of the voting rights and entitlement to assets on the wind up of the company

*The company must be a trading company

*The shareholder must have owned their shares for a period of at least two years

Of course ER can apply in many other circumstances but the examples above should provide an idea of the impact.

Other changes

The Chancellor announced a rise in the lower earnings for National Insurance (NI) self-employed contributions from £8,632 to £9,500 with effect from April 2020.

But the class 2 NI rate has increased by 10p per week. The net effect will be a drop in NI contributions of £73 for most self-employed individuals.

Employed staff, because they pay a higher NI rate, will benefit by £104. Employers will see a saving in their employer NI contributions of £22 per employee.

The personal allowance, the tax-free amount for those earning under £100,000, remains at £12,500 and the basic rate band also remains unchanged at £50,000.

This article first appeared in the Spring 2020 issue of AISMA Doctor Newsline and was written by Kieran Hancock , manager in the Plymouth office of PKF Francis Clark.

For further information about the content of this blog, please contact a member of our specialist healthcare team on 01253 404404 or 0115 972 1050.