here are so many worries as a new principal or locum it is hard to get everything right. Penalties for getting things wrong financially can be harsh; especially forgetting to register for national insurance, failing to plan for tax and self-assessment and being uninsured.
Tax and national insurance (NI) are among the biggest headaches. Gone are the nice monthly payslips with tax and NI worked out. Instead all your money is gross and it will look like a lot but take off NI and tax and it suddenly dwindles. The main dangers are that you will plan your finances based on the gross amount and that you will fail to set aside enough for your tax bill.
Assuming you finish as a GP registrar on August 1, you will not have to pay a tax bill again until January two years hence. If you become self-employed on August 1, 2003, your first tax bill will be due at the end of January 2005. The hidden catch is not only will you be paying tax in January 2005 for the 2003/4 tax bill, you also have to pay half of the tax for your predicted increase in income for the following year.
So if your pay increased by £10,000 from 2002/3 to 2003/4 the Inland Revenue assumes that for the following year your income will go up by £10,000 again and make you pay half the tax in advance on your predicted increase in income. In time it evens out, but if you are not prepared, the tax bill can really scupper your finances.
Remember to register as a self-employed business with the Inland Revenue within three months of becoming self-employed or face a £100 fine. Do this by phoning its self-employed helpline on 08459 154515. You will then have two forms of NI to pay class 4, income dependent and paid with your tax bill, and class 2, which requires you to make small quarterly payments equivalent to £2 a week. It is essential to keep good records, and these are best done as you go along. If you record all your details and expenses on a spreadsheet you will keep accountancy bills to a minimum, whereas if you just give your accountant a box of receipts you will be paying extra fees for one of his or her staff to extract the required information.
For the first year or two an accountant is a necessity. It is not just the inputting of data you pay them for but to negotiate on your behalf with the taxman. Their fees are usually less than they will save you in tax. Records should be stored for five years.
Taking out insurance
Next consider insuring yourself against illness. Individual requirements differ depending on whether you are a locum or a principal. If you are a principal you need to look at your practice agreement. Most practices cover sickness for four weeks, but after that you need locum cover insurance. This will have to cover daytime work, out-of-hours and Saturday mornings.
This may well be required for the following 11 months. If you are still sick after that the partnership may dissolve and reform without you. You then need income protection. Premiums for locum insurance are tax deductible as a business expense but income protection is not.
As a locum, arrange income protection to kick in after 12 months. The earlier it starts the more it costs you. The younger and healthier you are, the cheaper it is.
Some practices put aside money out of your drawings to save for tax. If they don't, get some sort of estimate from your accountant or from colleagues on your first tax bill so you can put aside the correct amount every month.
Make sure you put the money in an account bearing the highest interest rate, which preferably is the least accessible it is too easy to dip into otherwise. And get your accounts to the accountant early to ensure you have enough to pay your tax bill in January without any nasty surprises.
Switching from net to gross pay means sorting out tax and national insurance
so good planning can help avoid nasty surprises, says Dr Jason Twinn
Key points to making switch painless
· Plan ahead
· Ensure you register within three months as self-employed
· Get a good accountant with medical expertise
· Use all of your cash ISA allowance
· Make sure you plan for your tax bill early
· Get your tax return in very early,
not on January 31