Managing finance when leaving a partnership for locum work
GP partnerships are no strangers to change, with partners often coming, going or altering their working patterns. But the challenges facing the profession today have resulted in more GPs than ever considering their work-life balance as stress levels rise and burnout threatens. Some partners are looking to reduce the number of sessions they are working; others are thinking of relinquishing their role as partners and turning to locum work instead.
As an accountant I am currently advising a fair few GPs who are tempted by the locum option. Here are the key financial issues I suggest they consider before making a final decision.
If you are planning to retire and become a locum, look out for the other article in this two part series.
Leave the partnership
This is often more of a challenge for the remaining partners rather than you, the GP leaving the practice. Assuming succession planning was considered well in advance, there should be sufficient partners remaining in the practice, or about to be promoted in, to enable your departure.
The main challenge will be the payment of your capital and current account balances in a mutually agreeable timescale.
If you told the partners about your plans in good time then the ideal position would be to manage down your current account balance by adjusting monthly drawings or the practice making additional one-off payments when cash flow allows. If you also own a share in the practice property then you may choose to hold this or sell it to the remaining partners if they are willing to buy. Please be mindful here and take professional advice. If you hold the property for too long after retirement, or sell it before you exit the partnership, then you may not be able to benefit from more favourable Capital Gains Tax treatment under Entrepreneur’s Relief.
In reality, the partner leaving often waits longer for their money to be extracted than they would have wished, even though the remaining partners are endeavouring to make the payments as timely as possible (after all one day they will be in the same position).
The practice, or remaining or new partners, could consider raising finance to buy you out. If this is the case they should be mindful of any other changes in partnership on the horizon.
Draw up a rough personal budget
Ignoring any investment income you may have, the security of (broadly) regular monthly drawings will disappear. This will be replaced with any remaining balances from your exit from the partnership, which will probably not be regular at all, rental income if you have decided to hold onto your share of the practice premises, and payment for your locum work.
You must budget for the loss of any seniority payments, which would have been factored into your monthly drawings as a partner.
Coping without a partnership share and managing income from locum work needs specific consideration. Income will generally be more sporadic month on month. Your regular personal outgoings are likely to stay the same in broad terms and so your savings or an overdraft may need to be used to even out the peaks and troughs.
In other words ensure in good time that you have some savings relatively accessible and not tied into longer-term investments. This is particularly important for tax considerations.
Understand your new tax liabilities
The transition here will depend on whether your personal tax liabilities from the partnership had been paid to HMRC by the practice on your behalf. This would probably have been handled by the practice manager, who would have adjusted your drawings to allow sufficient cash to build up for the tax bill. Alternatively your drawings would have been higher and you would have paid HMRC direct.
Either way there will be a change. If the practice had paid taxes on your behalf then it must be clearly defined which party will pay the next tax bill when it arrives in either January or July following exit.
The change may be particularly marked if the practice had a non 31 March year-end. This is because there may be more than 12 months profits to declare for tax, less any overlap relief for profits taxed twice in earlier years. This is due to the way profits are assessed for tax on a “current year basis” from one year to the next. If in doubt an accountant can advise you on this point.
Another consideration is Capital Gains tax which may be payable if and when you sell your share in the premises. There can be quite a time lag before CGT becomes payable so it is sensible to keep a proportion of the sale proceeds back.
Prepare to pay superannuation and NI yourself
Your pension contributions would have previously been met by the practice as a deduction from monthly income with an annual balancing payment or receipt. As a GP locum, and assuming that you are continuing to contribute to a pension (i.e. not operating locum work through a Limited Company or Agency or choosing not to superannuate your locum fees), then you will be responsible for paying the contributions and completing the necessary forms. If you were to miss deadlines then your pension may suffer.
If your self-employed Class 2 National Insurance contributions were previously paid by the practice, it is essential that you make sure the practice does not cancel the direct debit to HMRC when you leave. Instead, the direct debit arrangement should be transferred so the new contributions are paid directly from your bank account. You also need to notify HMRC of your new self-employment.
Tie up loose ends
Don’t forget to tie up any loose ends when you leave the partnership. Make sure your name is removed from the VAT registration, bank mandate and any lease agreements.
Consider any add-ons the practice may have paid on your behalf such as fees for tax investigation insurance and professional subscriptions. You should also consider your insurances.
Finally, I may be biased, but if you are used to being looked after by the practice’s accountant then it would be wise for you to engage your own accountant when you become a locum. Your income will be taxed under self-assessment and an accountant will add value and give clarity. For example, if you can reliably estimate income levels then an accountant can reasonably well estimate tax levels for the coming two or three years, allowing for budgeting of the likely largest item of expenditure.
James Gransby is a partner at MHA MacIntyre Hudson (Maidstone), a member of the Association of Independent Specialist Medical Accountants.