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Limiting the impact of tax increases

GPs face a tough time with frozen income and rising taxes. Accountant Ian Tongue suggests three ways your practice can ease the pain

By Ian Tongue

GPs face a tough time with frozen income and rising taxes. Accountant Ian Tongue suggests three ways your practice can ease the pain

Forthcoming changes to tax and national insurance will not only affect GPs' personal finances but will also have a major impact on practice cash flow. This article provides a guide to how you can minimise liability.

The changes

Income tax

The most significant tax change is the introduction of a 50% tax rate for those earning in excess of £150,000, which is effective from 6 April 2010. Given that many GPs earn more than this, it could have a big impact on your partners' income.

Additionally, changes to tax relief on superannuation payments are scheduled

to come into force from 6 April 2011, which will reduce tax relief on superannuation contributions for those earning more than £150,000. These proposals are still under review and your accountant will be able to advise you further as matters are clarified.

Personal allowances

From 6 April 2010, personal allowances will be withdrawn for those earning in excess

of £100,000. This is applied on the basis of £1 of relief withdrawn for every £2 earned above £100,000, meaning that at about £113,000 the full allowance is lost. This effectively creates a marginal tax rate of 60% before superannuation and national insurance contributions (NI) are factored in.

National insurance

From 6 April 2011, NI rates will increase by 0.5 percentage points. This affects both the practice as employer and GPs themselves. These increases should be factored into any cash flow or drawings projections after

6 April 2011. Tax relief is available on the increase associated with the practice's staff but not on the GP's own increase.

Ways to minimise liability

Consider becoming a company

Practices could benefit from trading as limited companies as an alternative to GP partnerships. This can offer certain tax advantages, particularly for small practices.

Companies pay their own tax, on top of personal taxation paid on earnings. That tax is currently set at 21% for a small firm, defined as having net taxable profit of less than £300,000. For earnings over £300,001 there is an effective marginal tax rate of 29.75%, which many practices that become companies would pay on a significant portion of their earnings.

Whether becoming a company is beneficial for tax purposes depends on the balance of tax paid through the company and the amount that is also then paid in personal taxation. For many practices, income tax paid on their earnings, on top of the company tax rate, may make the overall tax burden higher than for a partnership. For this reason, becoming a company is often not the best course of action – your accountant can advise you.

A company is regarded as a separate legal entity and therefore it would be the company that held the contract with the PCT, not the partnership.

Key considerations are:

• Can the contract simply be transferred?

• Will the PCT renegotiate certain aspects of the new contract?

• Will the PCT put it out to tender?

• If we are a dispensing practice, how is this side of our business affected?

In addition, it must be clear what the benefits and set-up costs of changing structure are. If your practice is considering incorporation it is essential that you take independent legal advice and discuss the implications with your accountant.

Look at non-NHS income

Although switching from a partnership to a company might not always be appropriate, many practices have non-NHS income that could be channelled through a company. This could be structured in the same way as the partnership, or with each GP retaining their own work performed and having a separate company. However, the main tax savings only really materialise if other family members, such as non-working spouses, are shareholders and receive dividends. This allows some income to be offset against their tax allowances.

A key practical consideration of having a separate company with partners and spouses as shareholder is the risk of matrimonial disputes, which then involve the company and other partners.

If GPs are considering hiving off part of the business, it must be run as an autonomous business and HM Revenue & Customs would expect to see a charge for using the surgery premises and resources.

If GPs are considering switching income from NHS to non-NHS, they should note the ‘10% rule', as rent received may be abated if the work is performed from the surgery. Performing a higher proportion of non-NHS work can reduce overall superannuation liability, but taking this approach should be considered in the context of a GP's final pension, which will be lower if NHS work is substituted for non-NHS work.

Weigh up taking on extra staff or partners

GPs earning enough to put them in the higher band tax rate may wish to consider their level of work performed as part of their overall work-life balance. Using locums or employing a salaried GP to reduce partners' hours – and therefore reduce their income – could also relieve the tax burden. However, employing a GP is less flexible than hiring a locum.

Taking on an additional partner would also reduce the workload on other partners and therefore reduce the tax burden.

But, although sharing out the workload among new staff or partners might reduce the tax burdens of partners themselves, it may end up costing partnerships more in terms of NI. Talk to your accountant about this. The NI should not significantly affect a practice's tax liability but it does need to be factored into cash flow.

Tax planning for GPs is very much specific to their individual situation rather than being a one-size-fits-all approach. Discussing your circumstances further with your accountant should ensure that any available measures are employed.

Ian Tongue is a partner at accountant Sandison Easson and Co

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