Brother – what a rotten role model!
Practices that feed outside income into their profits will now make savings – Richard Vickery explains how
With effect from the 2003/4 tax year, which ended on April 5, 2004, there is a potential saving available for GPs in certain specific circumstances.
National insurance contributions (NICs) went through a fundamental change for employees and self-employed in 2003/4 with a 1 per cent surcharge on all income above the payment threshold, without limit, to pay for improvements within the health service.
What is perhaps less well known is that at the same time a useful bit of housekeeping was introduced that has opened up potential savings for some GPs.
Earnings as an employee paid into the accounts of an ancillary business and ultimately included in the calculation of profits chargeable to schedule D income tax are now excepted from class 4 NICs.
In practice this means that where a GP has an outside appointment on which the employer operates PAYE, and the GP includes the gross income in the practice accounts, which are then taxed with the practice profits, there is a potential double charge to NICs. This would be true even where no tax is paid on the 'employed' earnings because the GP's accountant has successfully negotiated with the Inland Revenue for an NT (no tax) coding, because NICs would still be deducted.
In the past, a claim for repayment of overpaid NICs had to be made. This complicated process could take a long time, and for minor amounts was hardly worthwhile.
Now GPs in partnership only need to remember to complete box 4.25 on their tax returns. Singlehanded GPs need to complete box 3.96. It is recommended that GPs check computations of NIC liability.
As a bonus, these earnings will not be included for class 4 NIC purposes in the profits and gains of the practice shown on the self-assessment return. So there is no longer any need to apply for deferment of payment of class 2 and/or class 4 NICs.
Deferment may still be recommended however, where business profits, net of excluded amounts, are above the class 4 lower profit limit and class 1 NICs are paid. This is likely to include the majority of GPs, so expect to sign the annual deferment form from your accountants as usual.
In the same way, interest paid can also be deducted in calculating profits for class 4 NIC purposes if it was incurred for business reasons and not deducted in arriving at business profits.
This commonly applies to personal borrowings to purchase an interest in a partnership. This is not new but easily overlooked.
In summary, GPs should check the charge for class 4 NIC on their tax returns if they have an outside appointment, or have personal borrowings for partnership funding and tax relief on the interest is claimed in their tax returns.
Richard Vickery is a senior manager with
PKF Medical Services Group, Guildford, Surrey