The 2016 budget announcement means a few changes that could affect sessional GPs.
The headline change announced in the Budget that might affect GPs is the change to the so-called IR35 legislation. This is going to be with effect from April 2017, and is designed to counter the tax advantage gained where someone who would otherwise have been an employee then trades through a company to obtain the tax/NIC advantages of ‘low salary/high dividends’ – rather than normal PAYE.
No details of how the new rules might work have been published at the time of writing, but the broad intention is that:
- If the ultimate ‘employer’ is a public service entity –(so the NHS) which will probably include GP practices as well as hospitals and
- The engagement would have been an employment were it not for the intermediary company
- Then the public service entity – or the agency supplying the individual - will be responsible for deciding whether IR35 will apply, not the intermediary company itself.
In theory, this should not change the tax outcome because the rules for determining whether the engagement would be caught have not in themselves changed.
However, very often it is not absolutely clear whether IR35 should apply; to some extent the legislation is open to interpretation, and also some people have previously operated on the basis of waiting to see if they get caught where it could be argued either way. In these sort of situations, the ‘employers’ will not want to take the risk, and it is likely they will err on the side of caution, and apply the rules if there is any risk at all.
It is intended that HMRC will provide more clarification of situations where the rules should apply and individuals will be able to check for themselves how their tax should be treated. This will be in place before the new rules come in in 2017.
The situations that will affect GPs trading through companies most are likely to be:
- Agency work
- Out of hours work.
- Long term or regular locum work
Note that it is each contract that needs to be considered, so some work could be subject to IR35 and some not.
Changes for 2016-17
End of ‘contracting out’ – whereby people in the NHS pension scheme as employees paid a lower rate of national insurance contributions to earn less state pension, where the pension in the NHS scheme was deemed to cover the loss. This will mean salaried staff will see higher national insurance contributions paid in their April pay packet – and employers will pay more from then too.
Stamp duty land tax (SDLT) on 2nd homes. There is an additional 3% SDLT chargeable on additional properties owned by an individual. If you are in the process of selling one home to buy another, then if the change does not happen simultaneously, you will be charged the extra, but it will be refundable if the sale of the first home goes through within 18 months. This additional tax is intended to deter buy to let situations, but will also catch new GPs particularly when they move on qualification without immediately selling their existing home.
The new dividend taxation rules come in. Broadly, treating dividends as your top slice of income, the first £5,000 of dividends are taxable at 0%, then 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and 38.1% for an additional rate taxpayer. These changes will potentially be expensive for GPs using limited companies compared to what you are used to.
On the positive side, dividends will no longer be ‘grossed up’ for a tax credit , which will mean lower gross income , and could be material for those currently on the borderline for High Income Child Benefit Charge or losing personal allowances.
Personal savings allowance: basic rate tax payers can have £1,000 of interest income before it is taxable and higher rate tax payers £500 but no allowance at all for additional rate taxpayers. This will exempt interest income from a large proportion of working people so interest will be paid gross from April 16, although you will still need to record it so it can be shown to be below the limits. The intention is that where interest will exceed the level of allowance, HMRC will adjust your code when they know about it, otherwise it will be taxable as usual via the self assessment return.
Buy to let: The changes to tax relief on mortgage interest on buy to let properties will start to bite from April 17 (see link). Make sure you understand how this might affect you so you have time to do something about it if you need to.
Tax rules are a constantly moving target. Help your accountant to help you, by keeping your records up to date and providing them promptly after the year end.