Doctors are facing many changes around the tax system and rates – and these may have a significant impact on your private practice business. Some of these measures have already been introduced and others are planned for the near future.
BASIS PERIOD REFORM
Basis period reform applies to sole traders and partnerships where their financial accounts are drawn up to a date that is not coterminous with the fiscal year-end, which is 5 April – or 31 March for many in practice.
These year-end dates have often arisen from the commencement of the business or, for older businesses, when the self-assessment tax system was introduced.
Legislation has now been introduced so that you have to report your profits to 31 March/5 April 2024, which may be a change to your usual year-end.
You do not officially have to change the date of your accounts, but it is expected that most businesses will, unless you are expecting significant differences between accounting years, in which case some planning may be required.
The impact of the change is that it can accelerate income tax due on the profits, as it unwinds the timing difference for the disclosure of earnings.
This creates overlap profit, or in other words, you have used the same profits twice on the first period of 1 July 2010 to 5 April 2011.
This can be a benefit if profits are rising, as it builds in a timing difference that you are effectively paying the tax on profits later.
Over the life of your practice, this would naturally unwind with usually a higher tax liability in the final year, often well after the business has, in fact, ceased.
The basis period reforms basically unwind the timing difference to align the disclosure for tax to the tax year-end. In doing so, the first period that was included twice is deducted from the longer period. More...
The Chancellor, Jeremy Hunt, presented his Autumn Statement on Thursday 17 November 2022.
The announcements have received mixed response, with many professional commentators highlighting that further tax measures and spending cuts may be announced after the 2024 election by whatever government comes to power.
Although headline income tax rates remain unchanged the thresholds at which different rates of tax apply remain unchanged except for the upper tax rate of 45% that will apply from £125,140, previously £150,000, from April 2023.
The term ‘fiscal drag’ has been much used by professional commentators to highlight that although basic and higher rates of tax thresholds have remained unchanged, it will, in a period of increasing wages, bring more individuals into paying higher rates of tax.
For example, the number of people paying 40% or 45% tax has risen from 4.1 million in 2019 to 6.1 million prior to the Autumn Statement and will rise further. More...
Many of you will have read reports in The Telegraph over the weekend headed ‘The electric car trap that could land you a £30,000 bill’.
The article highlighted the pitfalls associated with such a scheme and gave the example of NHS consultants.
The article is good in that it brings to the public attention something that, we as specialist medical accountants, have been aware of from the inception of the concept of the Annual Allowance (AA) many years ago and are well versed in giving advice.
The article goes on to explain that having the car for two years can avoid the AA tax charge. This is true in the majority of circumstances.
This is because the majority of any tax is associated with the deemed growth in the 1995 NHS Pension Scheme which is linked to your final salary and the best of the last three years of your service.
What the article failed to address is if there are any other ways to avoid the Annual Allowance Tax if you were in a three year or longer contract or coming up to retirement.
The good news is that there is a way to mitigate/extinguish the AA tax if you are in one of these scenarios.
The Budget announcements were FAB in the sense that the Fizz of champagne would be taxed less, Airport passenger duty for domestic flights would be reduced and the tax on Banks effectively cut compared to other businesses.
Other main beneficiaries from the Budget were the NHS getting an additional £5.9 billion and individuals on income support by way of the universal credit taper.
Most of changes that will affect you next year and beyond had already been announced previously by way of additional 1.25% national insurance and dividend tax to take effect from April 2022 and the corporation tax rates increasing from 19% to 25% for investment companies from April 2023 and trading companies rate of corporation tax increasing from 19% to 25% in a step wise fashion as profits progress from £50,000 and under to £250,000 and over.
Thankfully, entrepreneurial relief for disposal of business assets and winding up of companies remains unaltered as do the rates of capital gains tax and inheritance tax.
In the run up to Christmas, thoughts will be diverted to obtaining presents that may be difficult to source what with lorry driver shortages and issues of containers ships unable to offload goods. Once the present list has all hopefully ticked off then some attention can be addressed to tax planning.
There are still plenty of tax planning opportunities ranging from:
- Electric vehicles and limited companies whereby there are tax advantages
- Setting up PAYE scheme for spouse and children who already undertake work for you. You never know furlough may be reintroduced but separate from that there are benefits from increasing State Pension entitlements and other benefits from such schemes
- Extracting dividends before the additional 1.25% additional tax kicks in next year
- New equipment may be entitled to super accelerated capital allowances of 130%
- If not already done so, you may look at incorporation of your private practice
- For those of you with limited companies, check if you have alphabet shares
On the 4 February 2021 the government announced its response to the consultation in respect of public pensions. This is important as it includes your NHS Pension and sets out how the government proposes to remedy the discrimination found by the courts by transferring certain scheme members to the ‘reformed’ 2015 NHS Pension Scheme from the ‘legacy’ scheme, the 1995/2008 NHS Pension Scheme.
The response and proposed remedy are extensive but below we provide a summary of the key points.
- Dependent on age many of you will have transferred over to the ‘reformed’, 2015 NHS Pension Scheme, on 1 April 2015 or later under transitional arrangements. You will now be transferred back to the ‘legacy’ scheme, if you were in the 1995 scheme you will revert to the 1995 pension scheme rules and members of the 2008 scheme will revert to the 2008 NHS scheme rules.
- In the run up to retirement and intended from 2023, two Annual Benefit Statements will be produced showing the above to assist you in deciding when to retire.
The Annual Allowance is a complicated topic but here at Sandison Easson we have spent years understanding how the growth arises in the NHS Pension Scheme for Annual Allowance purposes. If you need any assistance planning to make the most of your Annual Allowances or preparing your Tax Return and/or Scheme Pays Elections then please get in touch.
Changes from April 2020 - Click here to watch our latest Annual Allowance webinar
The topic of annual allowance has always been a complicated one and in light of the healthcare crisis we have recorded a new webinar which explains the changes to the Annual Allowance from 6 April 2020. We also touch upon the announcements made by NHS England and NHS Scotland in 2019/20 together with a recap on the basics of the Annual Allowance and Tapering.
As many of you will know we have spent many years understanding how the growth arises in the NHS Pension Scheme for Annual Allowance and Lifetime Allowance purposes. In a number of cases we have identified incorrect Annual Allowance statements which have then been rectified following our intervention to avoid erroneous tax liabilities that were either too high or not due at all.
If you require any assistance with your Annual Allowance reviews or Scheme Pays Elections then please get in touch.
One of our partners, Aaron Swinton, has been invited to speak at the next Dinner and Conversation Evening held by DGL Practice Manager.
The event will be at the Swan, Shakespeare's Globe in London on Wednesday 20th June 2018 from 6.30pm onwards.
Aaron will discuss ways to minimise the effect that Tapering of the Annual Allowance has upon Consultants' tax affairs.
If you would like to attend this event then please contact Lisa Goodall on 01625 527 351 or send her an email to firstname.lastname@example.org
The Scottish Public Pensions Agency has announced it will now accept a scheme pays election from members who become subject to an Annual Allowance tax charge even where the charge or part of the charge relates to pensions growth ('pension input amount') between their reduced tapered Annual Allowance and the Standard Annual Allowance of £40,000.
This applies from the 2016/17 tax year and this will be welcome news for members of the Scottish Public Pensions Agency.
Without this option, if a member had pension growth of say £40,000 but was only entitled to a tapered annual allowance of £10,000 then they may have faced an annual allowance tax charge of up to £13,500 payable by 31 January following the tax year. In the first year this applies, they may also need to make a payment on account towards the following tax year which increases the amount due from £13,500 to £20,250.
As far as we are aware, the NHS Pension Scheme in England has not introduced the same voluntary option.
This is particularly important if your taxable income exceeds £110,000.
In simplified terms, the Annual Allowance is the maximum amount of tax free growth an individual's pension savings can grow by in any one year (this also includes the value of payments into a private pension). The annual allowance limit is set by HMRC and is currently £40,000. If an individual exceeds this limit they may have additional tax to pay.
From 6 April 2016 where an individual has “adjusted income” (basically, taxable income plus pension growth) between £150,000 and £210,000 their annual allowance will be tapered down from £40,000 to £10,000 on a sliding scale. This change could increase your tax liability by £13,500! It may be possible to avoid this by changing your business structure. If your taxable income is expected to exceed £110,000 then you may benefit by reviewing this. With the onset of Brexit and an increase in the Consumer Price Index, many doctors may face unexpected tax liabilities. If your taxable income exceeds £110,000 and you are an active member of the NHS Pension Scheme then contact us today on 01625 527 351 for a free no obligation discussion.