You can potentially save tax/NIC by putting freelance income through a limited company: however, you are not permitted to pension such income through the NHS scheme.
Now that the practices are responsible for paying the 14.3% employers contribution - and are using that to negotiate fees downwards (unless you're part of a locum chambers where you have much stronger negotiating power) so their net costs don’t change , some of that advantage may have been lost. However you should not underestimate the value of the NHS pension scheme.
Let’s assume a worst-case situation, where a practice will pay you the same amount whether you are in the pension scheme or not. As a self-employed locum earning £80k a year after expenses (before deducting superannuation), you’d be left with £44,128 in hand after superannuation/tax/NIC.
Earning the same gross through a company and paying yourself the whole of the profits by way of low salary/high dividend (but no pension contributions) would leave you £58,257 in hand.
This means in cash terms you’d be £14,129 better off by using a company – but is that worth the loss of pension entitlement? I put this question to Paul Gordon, an NHS pension specialist with specialist financial advisers MacArthur Gordon. He commented:
"In the current climate it is certainly tempting to have greater funds in your pocket as opposed to pension benefits in what could well be a number of years."
However, before rushing to set up limited companies or simply opting out of the pension scheme it is worth being aware of how beneficial the NHS Pension Scheme is.
As a member of the 1995 or 2008 Section you will currently have a Normal Retirement Age of 60 or 65 and at that point will be entitled to an index-linked pension for life that, in the event of your early demise, would also provide an income to your spouse and, potentially, dependents, typically until they are aged 23.
Under the 1995 Section you automatically have an entitlement to a lump sum, which remains tax-free and can actually be increased by commuting income at a ratio of 1:12, which is also the case with the 2008 Section.
There is likely to be a change of pension scheme for all members who were under the age of 46.5 as at April 2012, with the change to a Career Average Revalued Earnings Scheme and a Normal Retirement Age linked directly to State Retirement Age. It is important to note that under the details currently outlined, all benefits accrued to April 2015 will be protected.
With that in mind, is opting out of arguably the best pension scheme you will have access to a good idea? In the event of death or ill-health, a deferred member or their family are likely to receive potentially less benefits than a current member of the scheme.
Tax efficiency is certainly something more and more GPs are aware of regarding pension planning. Both the Annual and Lifetime Allowances are to reduce from the start of the 2014/2015 Tax Year which could have implications for a number of sessional GPs, particularly those with long-standing careers or significant superannuable income. But the payment of tax alone is not a reason in itself for opting out.
It has never been more important to be aware of your current pension position. It is essential to organise an annual statement confirming currently accrued benefits, membership to date and dynamisation figures. You will then be able to check that the information held is correct to date, along with calculating your position against the Lifetime Allowance.
The most important element in all of your pension planning is you (and your family). Please do not make decisions based on your friends’ circumstances, but make sure any changes are based purely on your situation and plans.
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