The most fundamental recent tax changes to affect GPs are the changes to pension savings.
Pensions annual allowance
In the 2011/12 tax year, the pensions annual allowance (the amount for which you can receive tax relief) was reduced to £50,000. The annual growth of the NHS pension is typically 16 times the yearly increase in pension, plus the increase in your lump sum, all adjusted for inflation.
From April 2014, the annual allowance will reduce to only £40,000. Even though the growth of the NHS pension is, in part, affected by the change in the consumer price index (CPI) over the year, it is hard to predict what the effect will be on the average GP.
However, if the movement in the CPI is similar to that in 2011/12, this new rate will catch the vast majority of high-earning GPs, who will be subjected to tax on the excess at their highest tax rate.
If you are affected by this and the tax payable is more than £2,000, you can opt for the NHS pension scheme to pay the tax. This is effectively a loan, at 3% plus CPI, which is deducted from your final pension. An election must be made for the 2011/12 year by 31 December 2013 and for subsequent years by 31st of July after the relevant tax return goes in.
Pensions lifetime allowance
From April 2014 there will also be a reduction in the lifetime allowance. The lifetime allowance is the maximum amount of pension saving you can build up over your lifetime that benefits from tax relief. This is typically 20 times your pension plus your lump sum. The reduction is from £1.5m to £1.25m.
For the1995 pension scheme, it equates to a pension of £65,217 reducing down to a pension of £54,438. Given that the average pension of a retiring GP is hoped to be around £55,000, this is likely to affect the majority of doctors, with tax charged on the excess at 55%.
One bit of good news is that, from April 2014 GP practices, and all other business and charities, will receive an employment allowance of the first £2,000 off their staff’s Employer National Insurance Contributions (NIC).
Tax issues for new partners
Due to the way HMRC collects tax when a new partner joins a partnership, their first tax return will usually include a large balancing payment and first payment on account in the first year so ensure that they are saving at least a third of their income for tax from the minute they start. Their first tax bill will be effectively one-and-a-half-years worth of tax.
One issue that is of particular concern to new partners is investing money in the practice. Typically this is done by reducing drawings over a period of around two to three years, however with the financial pressures that are on practices these days they often have to consider other options.
Taking out a loan to put money into the practice up front is now becoming more common. Often this is to help fund the practice if the retiring partner is taking out their entire current account balance on leaving.
However, sometimes the loan can be used to cope with the short- term drop in take home pay to stretch the period of investment from the usual two to three years to a much longer period of five or ten years.
In both circumstances, the interest on the loan would qualify for tax relief as long as the new partner’s current account does not go overdrawn.
Due to another quirk of taxation, for practices that work to non-March year ends, it is worth explaining to a new partner that the profits they are earning in the first few months will be subject to tax more than once. They will get relief for these overlap profits but not until they retire from the partnership.
When a new partner joins, it is important to have them start recording their personal expenses from the date they join and not leave them to produce the information at the year end. This is especially pertinent to motoring expenses as HMRC recommends all partners keep a log of their business mileage and retain fuel receipts.
There are many changes which occur when a partner takes 24-hour retirement, however, the tax changes can also be quite hard-hitting.
A partner taking 24-hour retirement usually sees an increase in their tax bill when superannuation payments stop, which also leads to higher payments on account.
This is usually due to the loss of tax-deductable pension contributions and higher overall income, with pension income using up the personal allowance and lower rate tax bands, leaving the partner’s profit share to be taxed at higher rates.
However, once the doctor reaches state pension age they do stop paying class 2 and class 4 National Insurance contributions.
When a partner is looking to sell their share of the surgery ‘entrepreneurs relief’ reduces the tax on a gain from selling a share of the surgery to 10% if:
- They owned the share for at least a year
- The sale of the surgery is linked to their retirement
- They do not have a formal lease in place between the partner and the surgery after retirement
However, they should compare the benefits of keeping their share of the property after retirement and receiving market rent, with those of using ‘entrepreneur’s relief’, as it will depend on the individual’s long-term plans.
The recent increase in the annual investment allowance (AIA), (from January 2013) to £250,000 per year is only a temporary increase, so practices should plan major purchases and renovations before 31 December 2015 to make the most of this relief for surgery assets, before it reduces back to only £25,000 per annum.
The AIA can be used to claim a tax deduction for ‘integral features’ on surgery extensions, so make the most of this by requesting a detailed schedule of works from the builder. The following, and anything spent on installation, will qualify for the allowance:
- an electrical system (including a lighting system),
- a cold water system,
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
- a lift, an escalator or a moving walkway,
- external solar shading
Ordinarily these items would only attract 8% capital allowances.
Making the most of your allowances
ISA allowances are presently £11,250 per year (£5,760 cash and £5,760 shares) and the interest or dividends are free from tax, which can be very useful in saving a lump sum to pay your tax bill, without contributing to it.
You can claim tax relief on gift aid donations which wins back 25% (or 31.25% for super rate payers) on your donation or subscription to qualifying national bodies, such as the National Trust.
Tax relief on motoring expenses
There are currently two ways of claiming tax relief on business motoring expenses: the first is to claim a business percentage of your entire motoring expenses; this percentage is usually based on the ratio of business to total mileage done in the year.
The second method is to claim 45p per mile for the first 10,000 business miles and 25p thereafter.
The first method usually works out to be more tax efficient as it takes into account the rising costs of motoring but does require you to keep detailed records of your motoring expenses.
The second method is much simpler, only requiring you to keep a mileage log, but usually does not give you the same overall tax deduction.
Whichever system you choose you can only change between systems when changing cars.
For a more tax efficient form of transport, motorcycles are treated as ‘plant’, so qualify for the AIA and bicycles also qualify for relief at 20p per mile
Often we look at the benefits of leasing a car versus buying one. When leasing a car, cars emitting more than 130gCO2/km receive a 15% deduction to the expense prior to working out the business use. This needs to be looked at carefully over the life of the car, as you could be paying out more in leasing costs than interest and capital of the car.
- Russell Finn is a client principal with chartered accountants Ramsay Brown and Partners which specialises in the finances of GPs. www.ramsaybrown.co.uk