Sean McLernon of RSM Tenon explains how GPs can plan for the forthcoming double whammy of the 50% tax rate and a reduction in personal allowances.
GPs have to plan their finances carefully over the next few years to prevent a large tax bill from 2012.
Significant increases in tax announced by the Chancellor last year are filtering through from this April and, unwittingly, you could already be earning income subject to 50% tax.
All affected GPs should, to varying degrees, be able to mitigate the impact of the tax increase by careful planning.
What is changing?
From April 2010, many GPs will be subject to a top rate of tax of 50% on taxable income in excess of £150,000, and a reduction in personal allowances if income exceeds £100,000.
If your practice year-end fell between April and December 2009, you could already be earning income on which 50% tax may be payable and you will also be hit by further tax increases in 2011.
From April 2011, higher rate tax relief on pension contributions will also be phased out if the relevant income exceeds £150,000. GPs will also be hit by the doubling of the proposed 0.5% rise in all national insurance contribution rates from 6 April 2011, announced last year in the Pre-Budget Report.
The impact of these significant rises in tax rates will be greater tax liabilities with the first extra payments, under self assessment, due on 31 January 2012.
How are personal allowances changing?
The personal allowance is due to be phased out at the rate of £1 for every £2 of adjusted income over £100,000. The personal allowance in 2010/11 is set at £6,475, and therefore will completely disappear if income reaches £112,950 or more.
This means the rate of income tax on income from £100,000 to £112,950 will actually be 60%. If the 2% national insurance, with effect from April 2011, is added, you could be losing 62% of your profits. This is a significant change and is before you pay superannuation contributions of potentially 31.5%.
Can I start planning now?
If your practice has its next year end as 31 March 2010 and you also account for any personal income on a tax year basis there are many opportunities to mitigate the impact of the tax increases.
You will need to discuss your specific circumstances with us. Things that will need to be considered will include timing of income extraction, pension payments, and how you and your spouse manage your savings and investments.
What about tax relief on pension contributions?
In his Budget speech last April, Alistair Darling stated that higher rate tax relief on pension contributions will be phased out if relevant income exceeds £150,000 from 6 April 2011.
These rules are not yet in statute, but don't think you can get around this by paying additional pension contributions in advance of the changes.
On the day of the 2009 Budget, restrictions were immediately put in place to prevent certain individuals making irregular, one-off contributions in order to obtain tax relief in advance of April 2011.
These rules were further modified in the Pre-Budget Report last December, meaning anyone with an income over £130,000 needs to consider these rules.
From 6 April 2011, there will be a graduated tapering out of the higher rate tax relief until £180,000 of relevant earnings are reached. After that, only basic rate tax relief will be given.
Any clawing back of excess relief given at source will be done through the self assessment process and in practice this means that there will be a further tax payment due in January 2013. For some practitioners this may be very large indeed and as much advance notice as possible should be a priority.
What about longer-term?
Depending on what level of relevant income you anticipate in the 2010/11 tax year there could be further opportunities arising for some longer term planning, including a possible change in your accounting year-end and how you account for your non-NHS earnings.
The announcements on 22 April 2009, in terms of the tax rate increases, are the first for a generation. They are likely to be with us for the long term and early tax planning is essential to try and mitigate their impact, as far as possible.
Being notified of the additional tax payments due in January 2012 and 2013 as early as possible is of paramount importance.
Sean McLernon is director of medical services at RSM TenonTax rates from April 2010 GPs have to plan their finances carefully over the next few years to prevent a large tax bill from 2012.