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.
As the overlap profits are usually set at a time when the business is in its infancy, they do not normally extinguish the extra profit that is being included.
This gives rise to an acceleration of the tax point on these profits, resulting in the tax being payable sooner, which is ultimately why HM Revenue and Customs (HMRC) is making the change.
Calculations for this are complicated and if you do not have a financial year-end aligned with the tax year end, then you should discuss this with your accountant who should be able to quantify the effect.
The good news is that any acceleration of tax from the forced change can be ring-fenced and paid to HMRC over a period of five years in equal instalments.
However, if you cease private practice during that period, then this would crystallise the remaining tax due in that particular tax year.
The main rate of corporation tax has increased to 25% from 1 April 2023. This means any company that earns over £50,000 in profits each year is likely to pay more tax.
A review is needed because this may make certain expenditure items – salary, pension or electric car, for example – more viable because the tax saving is greater.
The revised tax rate of 25% applies to profits in excess of £250,000, with the first £50,000 retaining the 19% tax rate. Profits between £50,000 and £250,000 are taxed at 26.5% and therefore costs incurred within this range attract higher tax relief.
Many consultants have interests in more than one company. From 1 April 2023, rules known as ‘associated companies’ become more important.
The main rate of corporation tax has increased to 25% from 1 April 2023. This means any company that earns over £50,000 in profits each year is likely to pay more tax
Previously, the main rate and small rate of tax was mirrored at 19%, so, effectively, the associated company rules did not make any difference to the overall tax paid. But now you could find yourself having to spread the limit when the higher rate of tax kicks in.
For example, if you controlled two companies and they were considered to be associated, the £50,000 limit would be halved and the higher tax rate would apply from £25,000 for each company.
Some consultants may have arranged their affairs in a certain way to trade using multiple companies, meaning a review is now necessary to ensure this is still the best trading structure.
In recent times, companies have been able to claim a capital allowances super-deduction for any assets purchased. They enjoyed tax relief of 130% on the cost of the asset.
This was introduced so as not to encourage companies to delay capital expenditure and wait for the higher rate of corporation tax. This super-deduction no longer applies for companies because the higher tax rate provides additional tax relief for those with sufficient earnings.
The pension annual allowance limit has now increased from £40,000 to £60,000 from 6 April 2023. Tapering – only to be considered if taxable income exceeds £200,000 – can still reduce the £60,000 annual allowance. The lowest tapered value has now increased from £4,000 to £10,000.
Another change implemented from 6 April 2023 is how inflation is applied to your pension benefits.
This change will remove the problem of inflation-driven pension growth, which was becoming a significant risk in the current inflationary times.
Other changes have been made to more fairly calculate the overall pension growth where your benefits in the 1995 scheme may have fallen.
For example, if you started in private practice on 1 July 2010 and decided to draw up your first accounts to 30 June 2011, you will have been taxed in the tax year 2010-2011 for the period 1 July 2010 to 5 April 2011.
The following tax year, you are on the ‘current year’ basis, which means you will have paid tax on the year ended 30 June 2011 profits.
The reduction can now be offset against growth in the 2015 scheme.
Meanwhile, the impact of what’s known as the ‘McCloud remedy’ on doctors remains uncertain. NHS Pensions is currently working on restating members’ records.
This is being carried out in stages, which will delay the issuing of annual allowance statements for 2022-23 because NHS Pensions needs to know the opening value of the pension after reinstatement for McCloud.
From the 6 April 2023, the lifetime allowance (LTA) charge has been removed and, in a future fiscal event, the Government will make the necessary changes to entirely remove the LTA from pensions tax legislation.
Many independent practitioners will have different forms of lifetime allowance tax protection and although the LTA tax no longer applies, there is a limit on the maximum tax-free lump sum that can be taken.
From 6 April 2023 it is £268,275 – 25% of the previous LTA limit. If your protection allows a larger lump sum, then this can be taken instead if you so wish, shielding more money from tax.
If the tax-free lump sum is exceeded, then the excess is now taxed at an individual marginal rate of tax.
The additional rate threshold has now decreased from £150,000 to £125,140. This means that as soon as an individual reaches the income level where their personal allowance is lost, the 45% tax rate applies.
Total exposure for doctors in this situation is an additional 5% on income between these bands, boiling down to a total additional tax liability of £1,243. In Scotland, the rate of 47% applies at the same interval.
Higher-rate taxpayers currently have the benefit of up to £500 as a tax-free allowance on interest, while additional rate taxpayers lose this allowance and pay tax on all interest.
The tax-free dividend allowance has now been reduced to £1,000 from 6 April 2023 and it goes down further to £500 from 6 April 2024.
The capital gains tax annual exemption has now reduced to £6,000 and then drops to £3,000 from 6 April 2024. Again, this offers planning opportunities.
MAKING TAX DIGITAL
The legislation for businesses to comply with making tax digital (MTD) rules has been delayed numerous times. Currently, VAT-registered businesses, mainly medico-legal private practices, are required to keep digital records and file returns using compatible software.
If you are self-employed or a landlord, then you will need to comply with the legislation from 6 April 2026 (income of more than £50,000) or 6 April 2027 (income of more than £30,000).
HMRC has stated that MTD will not be mandated for companies until April 2026.
Taking specialist professional advice will help you ensure that you have robust systems in place to deal with this legislation and help avoid unnecessary stress and risk.