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Pension tier and indemnity non-tax thresholds and take-home pay

My last article looked at tax thresholds which can affect GPs. One of our readers pointed out that I had not included non-tax thresholds which will also affect ‘take home’ income, so this month I’ll discuss some other thresholds.

Pension tier rates

You are probably aware of the pension tier rates, but not necessarily the implications. They do not work like tax rates where each band of income has its own rate. The rate is determined by pensionable income and is chargeable on the whole amount. So for example, if your pensionable income is £70,630 you would pay at 12.5%. If you earned £1 more, then you would pay at 13.5% - so you’d pay an extra £706 of pension contributions – without earning any additional pension.

What’s more as a GP locum or salaried GP you cannot just incur additional expenses to reduce pensionable income because all of a salaried GPs income (up to full time) is pensionable and 90% of a locum’s fees are pensionable.

For a GP principal it is impossible to know before the end of the year exactly what pensionable income is – as it is calculated by apportioning both income and expense shares from the annual accounts.

Annualisation rules

To make it even more complicated to work out, you also need to consider the annualisation rules. For sessional GPs in the 2015 scheme, if you do not have pensionable salaried income for the whole pension year (that is to 31st March each year) so you have a gap of more than a month in your employment or if you have a three month gap in locum income – then you have to gross up your income for a whole year to determine what tier rate you pay.

This annualisation process is highlighted on the Type 2 pension certificate each year (but unfortunately the forms provided do not give the correct answer in all cases….). Hopefully the 17-18 forms will follow the rules correctly for all situations.

To keep it as simple as possible – just don’t have a three month gap in locum work! Even one session is enough to give continuation for this purpose.

There are separate annualisation rules for GP principals in the 2015 scheme which are worked through in the main certificate of pensionable pay each year (and that form did seem to work last year according to the rules).

Action point for freelance GPs

Keep a running total of pensionable income so that you can see if you are likely to be close to any tier rate bands by the end of the year. It may be better to turn down a session than pay an uplifted pension tier.

Action point for GP principals

Make sure your partnership agreement is flexible enough for you to adjust profit share for holiday. Then if a full profit share would take you just over a tier rate, you could reduce your share for an extra day’s holiday to take you under again.

Seniority payments for GP Principals: Whilst these payments are reducing and will cease in a couple of years altogether, it is still worth thinking about. For GP principals, to get the full seniority payment you have to have pensionable income of at least 2/3rds of the national average. The national average is only known some years after the event, so you cannot look at this with any degree of accuracy. We’ve seen more GP principals recently, cut down sessions in the practice and top up with freelance work. Just be aware that if you reduce your practice income – either by reducing sessions or by having a low profit year – you could also lose some or all of your seniority money.

Indemnity cover

This is normally based on the number of sessions you work in a year of cover – and whether you are doing out of hours work. So if you work a session that takes you over the limit, that session could result in a large additional indemnity payment – so you could find you are actually working a few additional sessions for absolutely no net income at all.

Action point: keep a record of sessions to make sure you don’t inadvertently exceed what you are insured for (but equally don’t insure for more sessions than you need to) – and be aware that this will be based on the year of cover rather than the fiscal or pension year.

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 liz.densley@honeybarrett.co.uk.

2 Responses

  1. One thing I don't understand is that, if as a locum you pay a greater contribution to your pension (e.g. accidentally the wrong tier, or bring yourself into a higher tier by earning a bit more) why you don't just get more pension at the end of it? Where does that excess money go? Can you explain why you don't earn additional pension by putting more into your pot each month (rather than, say, through added contributions)? Thanks!
    • Same as taxes. If you exceed tax thresholds you pay more taxes but get the same services as everyone else. And that doesn't seem fair either!

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