Medical Practices - advice for new partners

Practice Finance, Profits, Tax and Pensions

Finance

The bulk of a practice’s income will come in the form of a monthly remittance from the NHS. These payments vary in size throughout the year with the calendar quarter payments being higher, particularly June when the balance of the Qof funds is paid.

Some practices keep an absolute minimum in reserve and distribute the maximum possible to the partners each month working on the basis that the funds are better in the partners’ hands rather than staying in the practice leaving the individual partners to deal with saving for their own tax bills.

Others operate in a more reserved fashion, holding reserves to cover such things as tax. These practices often work on the basis that the partners take a regular fixed monthly income leaving some profits in the practice. Any excess profits are distributed after the year end once the annual accounts are completed.

Both methods work but if your new practice is on the first basis then it is important that you recognise that you will have an irregular income and that you have to make provision for your own tax and national insurance. You need to put aside at least 33% of your income to cover tax and national insurance. This percentage needs to rise to around 41% if you have Student Loans outstanding. Because of the uneven income you may need to set aside a higher percentage of your income in the better months.

In both cases you will have to build up capital in the practice to the same level as the other partners, probably over the first couple of years. This can be paid in as a lump sum or by restricting your drawings from the practice until you have reached parity with the others.

Profits

Generally profits are allocated over the partners on the basis of the number of sessions done although there are other methods of sharing these. Some practices include seniority in total profits to be shared, some allocate seniority payments to the individual partners to whom they relate. You need to know how it is dealt with in the practice that you are looking at.

If the practice owns its premises, there will be payments received for rent. These normally get shared among those partners who own the property depending on their shares. You may be asked or required to purchase a share of the partnership property – usually from an outgoing partner (and usually via a bank loan). If you do, you would be entitled to your share of this income which you can use to fund the loan repayments. Any interest paid is offset against your profits for tax purposes (but not the capital elements of the repayments).

If Extended Hours are carried out, these may be shared in proportion to who carries out the duty as some partners opt out of this.

Tax

The tax year runs from 6 April to 5 April and after the first few years, your share of the practice profits for the accounts year that ends in the tax year is included in your self-assessment tax return. (if the practice accounts run to 30 June 2011, your share of the profit for that year is taxed in the tax year that runs from 6 April 2011 to 5 April 2012).

Tax for a tax year is paid in three parts. On 31 January during the tax year you make a payment on account of your liability – normally based on your liability for the previous year- on 31 July following the tax year you make a second payment on account of the same amount. Your tax return has to be submitted by 31 January following the end of the tax year (2012 has to be submitted by 31 January 2013). At that time – 31 January after the tax year – you pay any balance of tax for the year. Your liability is calculated from the return, the two payments on account are deducted and if there is more to pay it is due by 31 January. If there is a refund due it is repaid shortly after your return goes in.

Special Rules apply for the first few years

·        Year 1 you are taxed on your income from when you start to the next 5 April

·        Year 2 you are normally taxed on your income for the first 12 months of business

·        Year 3 you are taxed on your income for the practice accounts year

You can see there is a bit of double counting in the above to get you into the tax system. This creates what is known as overlap relief which gets saved up and deducted from your final profit from this self-employment. Unfortunately you usually find that the daily rate of profit in the earlier years is much lower than the rate when you retire so there is usually a slightly higher tax bill at the end.

You can claim certain non-practice expenses like professional subscriptions, medical equipment, course fees and motor costs. These costs will be needed by the practice accountants to finish off the practice accounts. You should keep hold of your receipts for these for a period of 5 years in case of investigation.

You have to be careful with motor expenses as you are only entitled to tax relief on business journeys. Travel to and from the surgery is private and most GPs find that their business mileage is only for house calls and for any travelling to and from courses. It is important that you retain a mileage log to record your business journeys – HMRC are insisting on these to justify claims. You can either keep all of your car running costs for the year, tot them up and then apportion that total to the business element, or you may find it easier to take 45p per mile for your business miles. It usually doesn’t make a great deal of difference unless you are doing house calls in a particularly heavily depreciating vehicle.

Unless you are in a rural practice or live very close to the practice premises, it is unlikely that your genuine business mileage will exceed 20% of your total mileage.

Pensions

When you start in partnership an estimate will be made of your pensionable earnings (which are around 88% of your taxable earnings) as your exact income will not be known until the practice accounts are completed. An estimated contribution should be deducted each month for you – please make sure that this has happened, particularly if your new practice fully distributes income on a monthly basis. If it is not deducted and you have been paid the contributions, these will be deducted from you by the practice when the pension scheme catches up with you.

Contributions are tiered depending on income levels ranging from 18.5% at low income levels, to a maximum of 22% of pensionable earnings if that income exceeds around £110,274 (2011 level). You should be aware that pensions are a chunky deduction and if you are full time you should expect to pay between £18,000 and £20,000 pa. Tax relief is available on these contributions which slightly softens the blow.

The pension year is the year to 31 March and every GP has to submit a statement of pensionable earnings by 28 February following. This is usually prepared by the practice accountants. That form calculates what contributions you were due for the year to the previous 31 March. Your actual contributions are compared with what you are due and any shortfall is collected from the medical services payment in March. They will also review what has been collected to date for the current year and adjust it in March in line with the previous year.

This can lead to quite large underpayments. If you have a 5 partner firm who have each underpaid £3,000 for the previous year and the current year’s contributions have not been reviewed, that firm could have an increase in its pension deductions of £30,000 in a single month (which is not a happy situation if the practice has no reserves and fully distributes profits each month). In the past, some partners who have been caught out by this received no pay for a couple of months. Not a pleasant situation!!

Golden Hellos

If you are eligible for one of these it is best not to receive this in your first period of self-employment as it will be taxed and pensioned more than once.

Someone who receives a £10,000 golden hello in their first year in practice could find themselves in this position.

Practice year end is 30 June and new partner joins on 1 July. Golden hello is received in first year.

This is taxed as follows:-

first tax year is based on period to 5 April so £7,500 of the golden hello is taxed in year one (9 months up to 31 March). In tax year 2 the full amount is taxed again.

Also pension contributions are due at say 21% on 88% of it – year 1 £1,386, year 2 £1,848 – total £3,234.

Tax relief is due on the pension contributions.

The net position is:-

Golden hello received

     

£10,000

Tax year 1 (40% of £7,500-£1,386)

 

£2,446

 

National Insurance 1% on £7,500

 

£75

 

Year 1 Pension contribution

   

£1,386

 

Tax year 2 (40% of £10,000-£1,848)

 

£3,261

 

National Insurance year 2

   

£100

 

Year 2 Pension contributions

   

£1,848

 

Total Deductions

     

£9,115

         

Net Income

     

£885

 If a golden hello is available, try if you can to be a salaried GP until it is paid. Tax, national insurance and pension are deducted at source but only once.

 Summary and tips

 ·        Make sure that you are saving enough for tax and don’t dip into your tax fund unless it is very short term

 ·        If the practice fully distributes its income try and build up an emergency fund

 ·        Find out how seniority is shared

 ·        Keep receipts for expenses and a mileage log to record business miles

 ·        Get that information to the practice accountants shortly after the practice year end

 ·        Make sure that you are happy with the pension deduction each month – if you are full time and you are not paying £1,500 per month you are not paying enough

 ·        Make sure that the practice accountants are happy with the current level of superannuation payments

 ·        Don’t take a golden hello in first set of accounts – get it as an employee if possible

 ·        If you are due a tax refund get your tax return back to your accountant asap – you do not see the cash until the return gets submitted.

 ·        Tax repayments go to the individuals, even if the partnership hold onto funds to cover tax and national insurance

 ·        If you do part time hours, your pensionable earnings ignoring seniority must be at least 2/3rds of average GP earnings to qualify for full seniority

If you’re interested in working with us and wish to discuss your requirements then please call us on 44 (0) 141 221 2257 or email contact@thomasbarrie.co.uk

Atlantic House
1A Cadogan Street
Glasgow
G2 6QE

 

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