Ill-health can lead to financial stress and disorganisation. Accountant Liz Densley explains how can you minimise this.
Before ill-health strikes:
- Know what sick pay you are entitled to – either from your employer or via your insurances (see Kevin Walker’s detailed article on this topic.)
- Know what your basic living costs are and try to ensure you build up at least 6 month’s worth to tide you over if you are unable to work.
- Organise your finances so major bills are paid by direct debit, so you are less likely to forget to pay them while unwell (but do try to check bank statements regularly still and ensure there’s enough money in the current account to pay them)
- Keep your accounting records up to date at all times.
- Make sure you put away money for your tax as you earn it.
- Understand your mortgage: what flexibilities do you have, can you take a repayment holiday? Can you overpay to create a buffer you can effectively use to cover future payments?
Keeping paperwork up to date
Invoice practices immediately on completing the work, and deal with the pension forms at the same time to reduce the risk of getting behind.
Keep important documents scanned and in a folder for your accountant (or just keep paper in an envelope), so you don’t have to hunt things out at the year end.
Consider joining a Chambers so they do the admin for you.
Provide information to your accountant as early as possible after the end of the tax year, so there is plenty of leeway before the tax deadline – and so you have as much warning as possible of tax due.
What if you can’t do your tax return on time?
HMRC will charge automatic penalties which are appealable if you have a ‘reasonable excuse’. An excuse would not be ‘reasonable’ if you were unwell in January – as they will argue that you had plenty of time prior to that to deal with your tax affairs. If you were unwell from April right through to January – then depending on the severity, that would probably be a reasonable excuse.
If you always keep your records up to date, then even with ill-health, there is a good chance that your tax return can be completed on time. If you have a ‘head in the sand’ approach and just ignore your tax affairs, then the penalties could alarmingly with £10/day penalties on top of the initial £100, plus substantial amounts of interest and surcharges if you haven’t paid the tax either.
What if you can get your return done, but can’t pay the tax?
First of all, ask your accountant to review the liability. When you make payments on account they are normally based on the prior year’s income. If you’ve then been unwell and not working, it may be possible to reduce these payments on account – by estimating the income for the tax year and calculating what would be due.
If the tax is right, but you still cannot pay it, then speak to HMRC early; they will be much more sympathetic if you approach them first, than if it is the debt management department chasing you. In cases of genuine difficulty, they are usually reasonable, although they will have expected you to make some tax savings prior to your ill-health.
Other points to consider:
If your income reduces below £60k pa and you are the higher earner, you may find you are entitled to child benefit (if you’ve previously stopped it). If you are not sure, it may be better to claim it and enjoy the cash flow benefit, even if it turns out that you have to repay it via your self-assessment later.
If you still have a student loan, the reduction in income will reduce the repayments you will need to make.
Consider whether you want to set up a Lasting Power of Attorney – so that someone could take over your finances if you were unable to look after them yourself. Whilst it is unlikely that you would have that degree of incapacity in the early stages of your career, as doctors, you will be well aware that it is not unheard of.
In the event of a worst case scenario, make sure you have sufficient insurance cover to protect your dependents, and that you have made a Will so that your assets go where you want them to.
So in summary, prevention is better than cure - keep everything up to date, understand your finances and ensure you have sufficient protection to cover any eventuality – and then your finances and tax will not add to the stress of any ill-health that you suffer.
Liz Densley is medical specialist partner with Sussex Chartered Accountants, Honey Barrett, and is secretary of AISMA (the Association of Independent Specialist Medical Accountants). Contact her at firstname.lastname@example.org.