You’ve finished your GP training and you’re ready to be let loose on the world, but has your training taught you how to deal with your tax and pension position going forward? Liz Densley, specialist medical accountant from Honey Barrett, explains all you need to know.
As a GP trainee
You are taxed under PAYE, so you receive a payment each month where tax, national insurance, pension contributions and student loan repayments have already been deducted and you get what’s left. So, all you need to do is:
- Know what you can claim for – exam and training costs whilst under a training contract only, professional subscriptions and mileage if you have to do visits in your own car (and you’ve not been paid for the miles).
- Check you have the right tax code, and call HMRC if your allowances are not right.
- Make sure, if you are getting to the end of your student loan repayments, that you communicate with the student loan guys to pay off your balance and get deductions stopped.
Once you become a fully qualified GP it all changes!
As a salaried GP, it starts off pretty much the same with tax, NIC, pension and student loan repayments all deducted at source. But remember, you will need to retain all your payslips, P45s and P60s.
But after the end of the year, you have to complete a Type 2 pension certificate to check that you are paying the correct contributions. You need to check your pension Total
Rewards Statement each year, to make sure that your practitioner pay is being correctly accounted for (sometimes if the Type 2 certificate does not filter through to NHS Pensions your pension record won’t get updated properly).
Where the fun starts is if you do locum work or other freelance work.
As a locum, you need to decide if you want to practice as a ‘sole trader’ (a single-handed practitioner) or via a limited company.
Do not just assume you will save a lot of tax by using a limited company; it doesn’t always.
You are not permitted to pension income through a limited company in the NHS Scheme, so if you are sure you want to maximise your NHS pension, you can forget using a limited company.
When can a company be beneficial?
- If you do not need to spend the income you are earning, and expect to take a career break in the future.
- If you have a low earning or non-earning spouse with whom you would like to share your business.
- If you need to reduce your taxable income (perhaps to avoid an annual allowance charge – probably not applicable in the first few years post qualification).
- At certain earnings levels – it needs to be calculated individually, taking account of salaried income and any other income.
- If you believe that your business might have risks that are not covered by your professional indemnity insurance, then using a company could protect your assets (if any) that are outside of the company.
You need to look at your specific situation (and plans for the future) to determine whether a company is right for you.
If you start off as a sole trader
- You need to notify HMRC that you have started a self-employment. You can do this on line or we can do it for you.
- You will need to keep business records; bespoke software like LocumDeck can be a huge help with this.
- Making Tax Digital does not yet apply to non-VAT registered businesses, but there is the intention to bring it in in the not too distant future, so writing up your records as you go is a good habit to get into, and LocumDeck’s inbuilt accounts package will help with this.
- You will only need to register for VAT if you provide anything other than exempt healthcare services, and that other element of your income is greater than £85k. This is only likely to happen if you get heavily involved with medico-legal work.
- You will need to save sufficient to pay your tax when it falls due. Your accountant can estimate this for you if you provide income details.
National insurance contributions and student loan repayments are both paid with your tax, and will be calculated via your self-assessment tax return, so these need to be taken into account when planning your tax savings.
Your tax return will need to be submitted by 31st January after the end of the year of assessment – so if your first period of locum accounts cover the period from August 19 to
April 20, the return must be in by 31st January 2021. Automatic penalties are chargeable for late returns, starting from £100 and then increasing by a daily £10/day penalty until nigh on £2,000 of penalties can be built up. Don’t let that happen!
Tax payment dates are as follows:
(using the above example)
- 19-20 balancing payment (this will be the total liability in the first year) – due 31st January 2021
- 20-21 payment on account (this will be 50% of the 19-20 liability) again due 31st January 2021
- 20-21 second payment on accounts – same amount as the first – due 31st July 2021
- 20-21 balancing payment (being total for year less the payments on account) – due 31st January 2022
- 21-22 payment on account (being 50% of the total for the year 20-21) – due 31st January 2022
So, there is a long time-lag between starting self-employment and paying the first tax – hence the need to save as you go.
Note that where payments on account are likely to be excessive (such as where self-employment has ceased, or you’ve been on maternity leave), you are permitted to reduce the payments on account to what you expect the liability to be for the year. This has to be on a reasonable basis – you can’t just reduce it because you don’t want to pay it then.
If payments on account are much less than the actual liability then that’s fine, they do not change, and the balance is payable in the January as shown above.
What expenses can you claim
Broadly you can claim any expense that is incurred ‘wholly and exclusively for the purposes of the business’.
This means that you cannot claim expenses that are partly personal (like clothing or general dry cleaning), but you can claim expenses where you can quantify the business use – such as part of your mobile phone or internet costs.
Costs where the personal use is incidental may also be claimed. For example, a training course where refreshments are provided, the refreshment element would not be disallowed. But a meal out between friends, where you happen to discuss a bit of business would be disallowed.
You will find a checklist on our website of the sort of costs you can claim. Keep receipts for expenditure and record it as you go – either on your locum software, or if you don’t use that, on a spreadsheet. Record clearly what the expense is for. It is much easier to your accountant to look at a doubtful expense to decide if it is tax deductible, than to try to guess what you might have spent but haven’t recorded.
There are two ways you can claim for motor expenses:
- A fixed 45p per mile (for up to 10,000 miles which is enough for more locums! 25p per mile thereafter)
- A business percentage of the total car running costs. Generally, unless you have a very expensive to run car, the 45p works out better.
Note that you can only switch between the types of these claims when you change your car.
If you buy an ultra-low emissions car (usually a pure electric car), then you can get a high upfront relief (100% of the purchase cost reduced by the private use element). But be aware that when you sell the car – anything you get for it, or its part exchange value – the business element will be taxable income. So, you are really only getting a cash flow advantage not an overall saving. That cash flow advantage may however enable you to buy something you couldn’t have otherwise afforded – so you could look at it as an interest free loan. Where you claim this relief, you have to claim a proportion of running costs (you are not allowed the 45p/mile – as that is deemed to include the capital allowance).
Use of home
You may make a claim for this on a fixed amount basis – using the number of hours that you work from home on your locum business.
Alternatively, you can look at the total house running costs – split between fixed and variable costs – then look at the proportion of the house relating to your study , then the hours you use the study for work vs hours it is used for personal work – and then we calculate the figure for you. If you have a high mortgage and a small home, this will usually come out better – otherwise, not always. We usually suggest we do an accurate calculation once and if it is materially better, continue on that basis – otherwise just use the fixed expense claim.
By ‘relief’ and ‘allowable’ in the above paragraphs we mean that your taxable income is reduced by that amount – so the reduction in tax is the amount of the relief at your tax rate.
How does pension work for a sole trader?
If you are doing out of hours work, you can usually choose whether to pension it or not, and if it is not your sole source of income, it will normally be pensioned under the GP Solo rules (in this case 100% of the fee is pensionable)
When you are working as a locum, only 90% of the fee is pensionable and you need to complete forms Locum A and B (all handled automatically within LocumDeck). Full details are found on the NHS pensions website, but broadly:
- When you invoice a practice, LocumDeck adds the employer contribution to your fee (currently 14.38% as for 19-20 the increased amount is paid directly between government departments) and get the practice to sign the Locum A form.
- At the end of the month you summarise your Locum A forms on to the Locum B form for the month, and pay over both the employee and employer amounts.
To do this you have to estimate your employee tier rate. This can be complicated if annualisation is required!
Annualisation – what is this and why do I need to know about it?
If you hold a salaried practitioner position from 1st April right through to 31st March in the fiscal year, then you do not need to worry about annualisation.
Where you have been a GP registrar (which is not a practitioner post) you will only have had practitioner earnings from, say, August – so you will need to consider annualisation.
For salaried work only it is comparatively easy – count days in the year where you hold a salaried practitioner post – say 240 days – then multiply your pensionable income (which is NOT the same as your taxable income) – it should show on your payslip – by 365 and divide by 240 and this will give you the figure that you compare to the tier rate tables to determine your tier rate.
For locum work only with no salaried appointment, they have said it needs to be calculated on a daily basis. So, if you worked 4 days per week from August to March (say 34 weeks) – the calculation would be 4 x 34 = 136 days – so take pensionable income (90% of fee) x 365 / 136 to give a much higher than expected annual equivalent.
We await the 18-19 type 2 certificate forms to see if there are any changes to this complex calculation.
Type 2 certificates
After the end of the year you (or your accountant) will need to complete a Type 2 certificate if you have had any salaried income as a practitioner. This will calculate the actual rather than estimated tier rate and you will have to pay (or get back) any difference.
If you are purely a locum, you do not (at present) have to complete one of these certificates – but the ‘reconciliation process’ that PCSE are supposed to consider has not worked very successfully in the past. You can contact them to request it if you feel you have overpaid.
Note that the tier rate you pay does not affect your pension – it is the pensionable income figure that affects your pension.
The repayments get calculated as part of your tax return and payments are made with your tax in January each year.
What to do now?
If having read this, you feel you need an accountant (our fee will be tax deductible!), then talk to us and we can help you including getting you set up as a self-employed person and guiding you through the tax/national insurance/student loan/pension minefield, so that you have the peace of mind that it is all being dealt with correctly.
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.