2023 was a significant year heralding change for the country’s finances – and yours. In this year before the next general election, there were key changes around pensions and other measures that benefit doctors – but some changes that have not.
Partner, Ian Tongue, highlights what doctors with a private practice business need to know for the year ahead
Allowance And Lifetime Allowance
Probably the single most significant areas of change affecting doctors is around the taxation of pensions.
The medical profession has been calling for a shake-up in this area for years due to the way doctors in particular can be penalised for working harder – making this a disincentive to work more hours.
From 6 April 2023, the pension annual allowance has increased to £60,000 and the lifetime allowance is set to be abolished altogether.
The pension annual allowance is the amount you can save into a pension before incurring a tax charge. The NHS Pension Scheme is complex with regards to how your pension savings are calculated and these usually bear no resemblance to your actual pension contributions.
Couple this with there being three NHS pension schemes and it makes the position difficult to understand for most doctors and results in variable pension growth annually.
The allowance is now £60,000 a year, which is a £20,000 increase, and for those earning less than £200,000 from all sources it is likely to significantly mitigate or extinguish future pension annual allowance charges.
For those earning more than £200,000 from all sources, the allowance is potentially reduced, as it was previously, and this is referred to as annual allowance tapering.
This process adds together your earnings and pension growth/savings and where the combination exceeds £260,000, you lose £1 of the allowance for every £2 above £260,000. This process continues until the allowance reaches £10,000, which is the new minimum, having been just £4,000 previously.
The result is a range of earnings between £260,000 to £360,000 where the pension annual allowance is being reduced. Previously, the range of losing the allowance was £240,000 to £312,000. Therefore, the change can make a significant difference.
Finally, the calculation of pension growth has been historically affected by an anomaly of when inflation is applied to the figures for tax purposes and NHS Pensions who calculate the growth each year, which was a year out of sync.
During periods of stable inflation, it made little difference, but with the most recent inflationary times, it would have created large swings in pension growth due to timing factors.
Thankfully, these are now aligned and the pension growth calculated each year should be more representative of above-inflation growth rather than affected by timing differences of when inflation is applied within the growth calculations.
The lifetime allowance is related to the overall value of your pension(s) and, previously, if they exceeded a set figure for the lifetime allowance, you would suffer a tax charge when you come to take the pension(s).
It was never a ceiling on the size of pension you could have, but was a key consideration for many doctors when it came to their pension options.
From 6 April 2023, changes to the lifetime allowance were announced such that, while it is technically still in place, there will be no lifetime allowance charges for 2023-24 and the lifetime allowance will be abolished altogether for 2024-25 through future legislation.
Previously, the lifetime allowance had been set at £1,073,100 for 2022-23. However, there remains a restriction on the maximum tax-free lump sum, which is capped at 25% of the previous limit, which is £268,275.
The above relates to the standard pension lifetime allowances, as this area has been subject to change many times over the years. A doctor may have various forms of pension protection which could provide a higher tax-free lump sum depending on their circumstances.
When the above were announced, it was politically sensitive, as these measures were not restricted to the medical profession or public sector and so it remains to be seen whether any changes are made in the next parliament, whoever may be in charge.
While not related to the budget or Autumn Statement, it is important to note that there have been significant new flexibilities introduced in 2023 for members of the NHS Pension Scheme.
These measures offer a significant amount of flexibility regarding your retirement options and further information is available within the members’ section of the NHS Pensions website.
Given all the taxation and pension reforms, now is a good time to speak with your independent financial adviser to discuss your options and plan ahead.
Trading as a limited company has been a very popular choice for consultants carrying out private work and also for private GPs. The corporate structure allows significant flexibility with regards to earnings extraction and can be more tax-efficient depending on the circumstances of the individual.
Over the last few years, the Government has increased the rate of tax paid by individuals on dividends and reduced the tax-free allowance.
Coupled with a significant increase to Corporation Tax from 1 April 2023, the use of a limited company to trade may be less tax-efficient than previously or be costing you money compared to other structures.
The income tax rates on dividends increased by 1.25% when the social care levy was announced in 2022, but unlike the National Insurance (NI) increases that were revoked, the increase in dividend tax rates remain, resulting in the following tax rates after the tax-free allowance has been used:
- Basic-rate taxpayers – 8.75%;
- Higher-rate taxpayer – 33.75%;
- Additional-rate taxpayers – 39.35%.
For companies, we take a step back in time to having different tax rates depending on the company’s earnings, resulting in the following from 1 April 2023:
- Profits up to £50,000 – 19%;
- Between £50,001 to £250,000 – 26.5%;
- £250,001 and above – 25%.
To prevent people setting up many companies to spread profits and exploit the 19% rate, the bandings are divided between associated companies. Therefore, if you have more than one company that you are significantly involved in, the higher tax rates may apply earlier in each of those companies.
As a result of the above, the effective tax rate of an additional-rate taxpayer earning money through a company and extracting profit via dividends can be as high as 54.51%.
For those trading through a company and extracting most or all of the profits to higher/additional-rate taxpayers, it may be time to consider your options and alternative trading structures.
Capital allowances are a special deduction against your taxable profits for expenditure on capital items – they are assets that will derive benefits over many years.
Assets such as these would historically be given tax relief over many years, but for some time now there have been generous capital allowances available that would allow you to deduct the expenditure in full against taxable profits.
These allowances have varied over the years, but, for the vast majority of doctors, they have exceeded any likely level of expenses incurred.
One of the measures announced in the Autumn Statement was a permanent change to allow full expensing for companies and this was communicated as a substantial tax saving for companies.
No doubt this is true for a large business looking to spend significant sums on equipment and expansion, but it is likely to have limited impact on taxable profits for the vast majority of consultants and private GPs – unless you are involved in setting up your own clinics/private hospitals.
Where you are involved in large-scale capital investment the use of a specialist adviser is strongly urged to ensure the maximum tax relief is obtained.
Income Tax Rates And NI
The Budget and Autumn Statement made some key announcements on income tax and NI.
The thresholds for the payment of higher-rate income tax of 40% were left unchanged, which, in the current inflationary economy, brings more taxpayers into paying higher-rate tax.
From 6 April 2023, the threshold to pay the additional rate of tax has been lowered to £125,141 in England and Wales.
This may seem like an odd earnings level, but it is no coincidence that the top of the earnings threshold where you lose your personal tax allowance is £125,140. For Scottish taxpayers, the top tax rate of 47% now applies at the same threshold.
This will bring more taxpayers into the additional rate and top rates of tax.
NI has been the topic of much change in 2022 and 2023 with the previous announcement of the social care levy of 1.25% that was to apply in 2022.
This was repealed in later announcements from the Chancellor and at the most recent Autumn Statement, NI rates were reduced for the vast majority of taxpayers.
For employees, the rate of employee NI has reduced from 12% to 10% within the basic-rate earnings band £12,571-£50,270. These measures apply from 6 January 2024.
For the self-employed, the class 2 rate has been abolished and the highest rate of Class 4 national insurance on profits has been reduced from 9% to 8%.
These measures apply from 6 April 2024.
Minimum wage legislation
The national minimum wage saw a significant increase from 1 April 2024 across the various age groups that it applies with the youngest and apprentices seeing over 21%. The national living wage applying to all 21 years of age and over increased 9.8% to £11.44 per hour.
If you employ any staff in your business, it is important that you review your pay rates in advance of the increases to ensure that you are compliant with the new rates.
One knock on effect can be on those who are paid above the minimum but are in a more senior position to those on minimum wage, because the gap between them may have narrowed.
It is likely therefore that you will need to review your salary levels for all your employees.
Savings and investments
Given the higher interest rates available in the current economic climate, doctors with significant savings are likely to exceed the tax-free savings allowance which is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, with no allowance for additional-rate taxpayers.
For those with dividend income, the tax-free amount is £1,000 for 2023-24 and reduces to £500 from 6 April 2024 onwards.
For those with investments that attract capital gains tax, the tax-free amount has reduced to £6,000 for 2023-2024 and reduces further to £3,000 from 6 April 2024 onwards.
For those with ISAs, the Government is introducing measures to simplify these tax saving vehicles and provide more choice and options to move your savings. The annual amount that can be saved remains unchanged at £20,000.
Tax System Reform
There are a number of changes ahead in relation to the tax system and the effect of these on the tax-payer will depend on their individual circumstances.
Basis period reform
For those self-employed individuals who adopt a financial year-end for their business that is not in line with the tax year end, 2023-24 is a year of transition to move your earnings disclosure on your tax return to a 5 April basis.
For many in this situation, it will accelerate tax that would have been payable at a later date, but the reforms allow this to be spread by up to five years depending on circumstances.
If you are self-employed and do not use a 31 March or 5 April year-end for your business, it is important that you discuss your circum-stances with your accountant to understand the impact for you.
Cash accounting has been extended to apply to all unincorporated businesses from 6 April 2024.
This means that, by default, you would declare income when received and costs when paid. This is in contrast to the current ‘accruals’ based system, which computes income on an earnings basis and costs on a liability basis. An accruals basis can still be adopted by electing to use that basis.
It is likely that the doctors who will benefit from this most will be those who undertake medico-legal work, because this type of income can take a long time to be paid, resulting in tax being handed over in advance of receiving payment for the work done.
For others, electing for the accruals basis is likely to be the best option, as it would ensure that your income is fully reconciled to amounts owed to the business, which is a key financial control to ensure that you are being paid for all work undertaken.
Making tax digital (MTD) MTD as it is referred to is not new and has been particularly problematic for HM Revenue and Customs (HMRC) to introduce. That has led to years of delays.
The basis behind MTD is to report your taxation figures to HMRC more frequently, which, for most, will be quarterly. The submission will be electronic and require suitable software to be used.
These measures apply from April 2026 and no doubt there will be further detail released in advance of this regarding the exact requirements for businesses.
The above covers the most significant areas of recent change that are likely to affect doctors.
As always, it is important you discuss your financial circum-stances with your accountant and independent financial adviser to ensure you are best placed in the ever-changing financial world we live in.