Managing finance when you retire to become a locum
Accountant James Gransby has a five-step plan for GPs retiring from a partnership position for a sessional career
A popular option for GPs approaching retirement has been to relinquish their partnership but continue working as locums. And with concerns over the new contract and the reduction of seniority payments, many GPs over 55 may well be considering this option with renewed interest. So what are the financial considerations GPs need to heed if they plan to work as a locum while drawing their NHS pensions?
As an accountant, the advice I am currently giving my clients falls into five steps, much like the previous article in this series.
I have written about the issues of succession planning and the paying of your capital and current account balances within the partnership in my previous article on swapping partnership for locum work. Read the first article to find out more about leaving the partnership.
1 Inform NHS pensions
You should inform the NHS pensions agency in good time about your plans to retire. Ideally you will be taking advice from an independent financial adviser who will be able to assist with the protocol. The lump sum you will receive on retirement could be significant so you will have plans on what to do with it.
A word of advice though. Don’t tie it all up in longer-term investments. You should keep some savings relatively accessible to tide you over during the inevitable financial peaks and troughs that will occur after you leave the partnership. While you will have regular income coming in from your pension, the amount you earn as a locum could be sporadic.
2 Discover your new tax liabilities
While your NHS pension income will have tax deducted at source, you are responsible for accounting under self-assessment for tax payable on profits arising from your locum work.
This is no different from the calculations undertaken on your share of taxable profits from partnership, but these may have been managed behind the scenes by the accountant and practice manager. It would be good practice to take advice on your new tax liabilities to ensure that there are no surprises in terms of tax payable. All of the locums I act for choose a 31 March or 5 April year-end to run coterminous with the tax year for simplicity and efficiency.
Now you are retired from the NHS Pension Scheme you will no longer need to pay superannuation. This, of course, will give you more cash in your pocket but since the contributions were tax deductible there will be a marked increase in your taxable income so your tax payments will also rise.
3 Check your tax code
The tax code applied to your pension income will need to be checked – this is especially important it you are receiving a payslip from elsewhere. A BR code will only deduct 20% from your pension income and since the tax authorities will not know the level of income you are earning as a locum there may be a nasty surprise in store when the shortfall is reclaimed. A D0 tax code might be most appropriate in many cases since this is used to deduct 40% from your pension each month. An accountant can check your tax code for you.
4 Prepare to pay NI yourself
Unless you are over state pensionable age at the beginning of the tax year then you will need to pay Class 4 National Insurance contributions on any profits earned from your locum work. In the current 2013/14 tax year contributions start at 9% on profits between £7,755 and £41,450. After that they fall to 2%.
Again, if you are below state pensionable age, your Class 2 NICs, payable by the practice when you were a GP partner, will need to continue if you work as a self-employed locum. 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 own bank account. You also need to notify HMRC of your new self-employment.
5 Tie up loose ends
When you stop working as a GP partner make sure you tidy up before you leave. Check that your name has been removed from the VAT registration, bank mandate and any lease agreements.
Now your pension is in payment you should also consider your insurances.
Finally, engage an accountant who can help you navigate the tax requirements of your new self-employment as a GP locum. An accountant will help you estimate tax levels for the coming years, based on your own predictions of how much you will earn as a locum.
James Gransby is a partner at MHA MacIntyre Hudson (Maidstone), a member of the Association of Independent Specialist Medical Accountants.