Money Matters

Experts offering insight and advice on the financial issues of the day

Tax: Are you sitting on a retirement timebomb?

By Justine Roberts - 28th December 2011 12:49 pm

This year we will see an unprecedented attack on the pension provision of higher earners. With the government putting in place austerity measures the NHS pension scheme is directly in the firing line only four years after it was last changed. As individuals there is little we can do to influence government policy however there is another even more pressing issue estimated to affect at least 100,000 and possibly up to 500,000 higher earners retiring over the next few years that you can plan for.

Currently anyone retiring in the current tax year can accrue pension benefits equivalent to £1.8million. This figure is calculated as the current value of any personal pension with the NHS being valued as the annual pension entitlement multiplied by 20 with tax free cash entitlement added.

From April 2012 this current pension allowance is reducing to £1.5million. The government has announced it will remain at this level at least for the lifetime of the current parliament, after the 2015/16 tax years there is no indication of what is likely to happen however with the expectation of a continued financial squeeze there may be little appetite amongst politicians or the general public to increase pension tax benefits for high earners.

While this allowance may still seem generous, any doctor retiring with an NHS pension of £50,000 will have utilised £1.15million of the allowance leaving scope for £350,000 of private pension arrangements. Increase the NHS pension to £60,000 and the level of permissible private pension fund reduces to £120,000. NHS pension increases have been significant in the last few years and coupled with private arrangements means that a significant number will breach the new limit. Some consultants are losing their enhanced protection as many have breached the terms of the agreement due to these increases over the past few years.

If allowances are exceeded the penalties are harsh. Pension accrued above the allowance is returned either as a lump sum or as a pension. If returned as a lump sum it is subject to a 55% tax penalty, if taken as income there is an immediate penalty of 25% plus taxation at marginal rate making a tax rate of up to 75%. This change means anyone planning their retirement around the higher allowance of £1.8million is now sitting on a tax penalty of up to £165,000.

There are a number of things that can be done in order to mitigate these penalties but time is short. Firstly it is possible to seek from the revenue a protected allowance. This is called fixed protection and preserves the individual’s higher allowance of £1.8million. The significant downside to this is that in order for the protection to remain valid it is necessary to cease all contributions to pensions including the NHS scheme. Leaving the NHS pension scheme is a significant step and I would strongly urge taking professional advice prior to making this decision. The nomination for fixed protection must take place before April 2012.

A more drastic measure is to draw retirement benefits before the new limits apply in April. This may not be practical due to the timescale; however it is possible to draw retirement benefits without ceasing work.

It makes sense to review private pension contributions being made if likely to be close to the lifetime allowance, as the tax penalties for exceeding the limits are significantly greater than the reliefs received for making the contributions. It also makes little sense investing in high risk pension funds if the outcome is pension growth that will be heavily taxed when benefits are taken.

The reduced lifetime allowance has the most immediate impact upon those retiring within the next three years. However, with uncertainty over how much - if at all - allowances will rise in years to come, more and more doctors will find themselves breaching this limit especially those with high NHS incomes.

It is always sensible to review pension arrangements and with legislative changes affecting the NHS pension and market forces playing havoc with private arrangements, it is more important than ever to ensure retirement planning is appropriate.

Justine Roberts is a director of Medical & Financial Ltd who are an Independent Financial Consultancy Service, specialising with doctors and dentists. She has over 12 years experience working with the medical community providing pension, investment and general financial planning advice. For further information email Justine on justine@medicalandfinancial.com

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When can a consultant claim for their threads?

By John O’Leary - 24th October 2011 8:40 am

A common gripe amongst hospital consultants is that they are not entitled to tax relief on the cost of their daily clothes. The basis for such treatment goes back to an infamous tax case where it was decided that most clothing for purchased for warmth and human decency rather than to aid a profession.

You will have to pay a sizeable amount each year to be turned out in a manner fitting to your position, yet the Revenue (HMRC) will not be impressed and will almost always seek to deny tax relief. The situation is the same regardless of whether you have a pure NHS role and/or a private practice.

The medical profession do get through suits at a much faster rate than an ordinary office worker, no doubt aided by the amount of vomit and dry cleaning that can be a part of daily life, but this does not create a sympathetic reception from the powers that be.

Above it was stated that HMRC ‘almost always seek to deny tax relief’, so does that mean that there are cases where clothing can produce an acceptable claim for tax relief? Yes, but the cases are limited. Occasionally you will come across consultants who have purchased their own medical shirts and had their name/position embroided on the item. Such shirts are purely for business purposes and can be claimed, but only via a private practice.

In rare cases some private clinics charge their surgeons for the hire of theatre clothing, and again this will be relievable for tax purposes.

For the most part consultants need to resign themselves to not claiming anything for the purchase of their clothing, but they should be claiming for dry cleaning through a private practice.

John is a specialist in the taxation of hospital consultants with Medic-Tax. John can be contacted at jo@medictax.co.uk

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When’s a payment an honorarium and tax exempt?

By John O’Leary - 27th July 2011 12:47 pm

There is a type of payment that is becoming common to consultants - the honorarium.

An honorarium is a payment that is made without expectation or obligation, and is normally a gesture to recognise the activities that have been provided by an individual rather than as a payment for services rendered.

True honorariums are exempt from tax.

If a consultant provides their time, for instance on lecturing to institutions or hospitals, and does not expect or invite any reward for their activities, a payment made as a gesture of gratitude should be exempt from tax. If, however, a consultant has links with a business and provides services for which he would normally expect to be paid, such remuneration is taxable.

The problem we have is that many businesses are making use of the consultant’s time and subsequently make a payment marked as an honorarium. We then come back to the very useful principle that “if something looks like a duck and quacks like a duck, then…”. The act of calling a payment an honorarium does not automatically make it so. If it was that simple we would have the word stamped on every payslip and no one would pay income tax again.

So, what happens if you did some lectures or articles last year and received payments marked as honorariums? You probably have a good feeling as to the true nature of the payment. There are some simple tests, for example, would you have undertaken the activity for no payment at all and is it customary to be remunerated for such services?

If you feel it was an unexpected goodwill gesture, then by all means exclude it from your tax return. If your only rationale is that you have a piece of paper stating that it is an honorarium, you could be in for a bumpy ride if you do not declare it.

John is a specialist in the taxation of hospital consultants with Medic-Tax. John can be contacted at jo@medictax.co.uk

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Pros and cons of trading as a limited company

By Jason Sharp - 1st July 2011 3:11 pm

Over the last few months the telephone has not stopped ringing with the same question being posed to me.

“I have heard from one of my colleagues that if I trade as a limited company for my private practice or locum work I will save £000’s in tax” - is this true?

In some cases this statement is true and in others the savings are negligible. One size does not fit all and tax savings will depend on a number of issues such as:

· Level of your private income;

· Could a non working or lower earning spouse be involved in the company?

· Will you be extracting all the company profits?

The good news is if structured correctly substantial savings can be achieved and you could reduce a personal tax and National Insurance rate of 51% to just 10% which is obviously very attractive.

I appreciate that this may seem too good to be true but there will be many of your colleagues already benefiting from this.

So how is this achieved? Your existing private practice has a value and it is this value (including goodwill) that is sold to the new company. As you will have sold your personal trading business, this will crystallise a liability to capital gains tax at a rate of 10% due to the availability of ‘entrepreneurs relief’.

If the value of your personal private practice was say £100,000, then you would have a capital gains tax liability of £10,000. If the sale takes place in July 2011 then this would not actually be payable until 31 January 2013.

Obviously the new company would not have £100,000, so this would be money owed to you and can be repaid by the company tax-free potentially avoiding 51% tax and National Insurance for a number of years.

As an additional bonus the new company may be able to write off the goodwill for tax purposes over a number of years thus reducing the company’s Corporation Tax liability.

The pitfalls are few are far between but care needs to be taken not to overvalue your private practice as this could result in significant personal tax liabilities. Given the potential tax savings highlighted I am sure you can see why HMRC are keen to ensure valuations are accurate.

Jason Sharp is contactable at www.doctorstax.co.uk. This article should be used for general guidance purposes only.

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Pensions - effects of cutting the Annual Allowance

By John Ralfe - 31st May 2011 10:02 am

In my last article, I looked at the impact of the Hutton pension reforms on hospital doctors, especially senior consultants in their late 40s and 50s. What about the impact of the pension tax changes, which happened from April 2011, on this same group?

From April 2011 the annual tax deductible contribution, or Annual Allowance, to a pension scheme is reduced from £255,000 to £50,000. For a defined contribution pension the allowance is simply the employee and employer’s combined cash contribution, but for the NHS defined benefit scheme the calculation is more complex.

The annual pension value is calculated as the increase in pension entitlement during the year, minus inflation, multiplied by a factor of 16, representing the capital value of the pension increase, plus the increase in cash lump sum, again minus inflation. Any personal pension contributions, including NHS AVCs, count towards the £50,000.

The good news is that a contribution over £50,000 in any year can be offset against the prior three years, so effectively a £200,000 contribution can be made over any four years. Because of this, most consultants will not breach the £50,000 Annual Allowance, but some will, especially in the year they get any increment or merit award and they need to be crystal clear about their tax liability.

Any tax below £2,000 is paid directly by the individual, anything above this is paid by the pension scheme, with a corresponding reduction in pensions benefits (an administrative nightmare for the NHS Pension Scheme).

From April 2012 the total maximum pension pot, or Life Time Allowance, is reduced from £1.8m to £1.5m. The value of the NHS defined benefit pension pot is calculated by multiplying the pension by a factor of 20, plus the cash lump sum, plus any personal pension or NHS AVCs.

The reduction in Life Time Allowance to £1.5m will effect more people - as a rule-of-thumb, any consultant currently earning over £110,000 is in danger of hitting the limit and should plan how to remain under the limit or expect to pay extra tax. And don’t forget any personal pension pot, including AVCs, counts towards the pot.

The Inland Revenue imposes a penalty of 25% for pension pots above the Life Time Allowance. If individuals choose to pay the penalty annually there is a 25% tax charge and the remaining 75% is then taxed at the marginal rate of 40%, so the effective tax rate is 55% (i.e. £100 pension, pay £25 penalty tax, then 40% on the £75 remaining, or £30 income tax). If individuals choose to pay the tax as a lump sum it is simply taxed at 55%.

Anyone who already has a pension pot over £1.5m can apply for exemption, but no new annual pension benefits can be earned.

For the future, the government has said the Annual Allowance will be frozen at £50,000 and the Life Time Allowance at £1.5m until 2015-16 and both are likely to be inflation-linked after this. The multiplication factors of 16 for the Annual Allowance and 20 for the Life Time Allowance are artificially low and may be increased at some point, as pressure continues for the real value of public sector pensions to be measured and taxed properly.

Pensions taxation is seen as an easy target for cash-strapped governments and this is likely to continue. One possibility is that tax relief on new contributions will be limited to 20% or that the amount of the tax free cash lump sum may be capped, both of which would hit consultants.

There is no doubt that consultants will be hit by the Hutton reforms and the taxation changes. The precise impact will vary amongst individuals depending on a complex mix of age, NHS salary, non NHS earnings and personal pensions. Now is the time to be examining the impact and what, in practical terms, they can do about it.

John Ralfe is an independent pension consultant and formerly head of corporate finance at Boots. Contact him on JohnRalfe@JohnRalfe.com

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Hutton Report: implications for your pension

By John Ralfe - 10th May 2011 8:10 am

The recent Hutton Report contains two practical recommendations for public sector pension reform; an increase in the normal retirement age in line with the state retirement age, and a move from final salary to career average pensions.

Separately, the tax rules on pensions changed from April 2011, reducing the annual tax deductible pension contribution (’annual allowance’) from £255,000 to only £50,000 and the total maximum pension pots (’life time allowance’) from £1.8m to £1.5m.

This article will explore how consultants will be hit by the Hutton reforms, which, despite union opposition, will probably be introduced from April 2015. A later article will look at the tax changes.

Linking the normal retirement age to the state retirement age means 66 for anyone born after 1955, and, compared to the current retirement age of 60, is certainly a significant reduction in the generosity of benefits.

The NHS Pension Scheme estimates for future pensioners have increased by 5 years in the last 5 years, to 91 for men and 94 for women, although this simply means the previous longevity estimates were grossly understated, not that longevity has genuinely increased so dramatically.

What about career average? The current final salary pension works to the advantage of hospital doctors, expecting chunky threshold increments. Under a standard career average scheme pensions already earned, and each year’s future pension, is increased only in line with inflation, regardless of salary increases.

But the Hutton career average pension is not as tough as it seems, and certainly less tough than the private sector - pensions already earned before the change will continue to be increased in line with salary, and each year’s future pension will be increased in line with average earnings not inflation.

The Hutton reforms could also have been much tougher on inflation protection - unlike private sector pensions where pension increases are capped at 2.5% for pensions earned after 2005, Hutton proposes no such cap, so public sector workers continue to be fully protected against inflation.

Furthermore, there has been no earnings cap, at say £75,000, which was widely expected. This was anticipated not so much as a cost saving measure, given the small numbers involved, but because it is ‘fair’ for the highest earners to tighten their belts the most. Hutton argued, unconvincingly, that an earnings cap involves huge complexity and the issue was better addressed by tiered contributions, as at present.

Further good news: the annual accrual will be 1/60th of pension, like the current 2008 section, significantly more generous than the current 1/80th pension and 3/80th cash in the 1995 section.

Overall the direct impact of the Hutton reforms could have been a lot tougher and it certainly leaves NHS doctors with a much better pension than majority of the private sector.

But, of course, the government has already announced two other changes separately from Hutton.

The impact of increasing pensions in line with the lower consumer price index not the retail price index, from April 2011, compounds over several years retirement to make a material difference.

The 3% average increase in member contributions will take any hospital doctor earning over £100,000 from 8.5% to, probably, 11.5% of salary.

We should not see the Hutton reforms as a ‘final settlement’ and pressure from the private sector for further changes will continue. Like painting the Forth Road Bridge, by the time the Hutton reforms take effect in 2015, it will be time to consider further changes.

As well as increasing the retirement age, depending on any changes in the state retirement age, the most likely change is capping pensionable salary at, say £50,000, with a defined contribution pension above this for higher earners.

There is no doubt that consultants will be hit by the Hutton reforms and the taxation changes. The precise impact will vary amongst individuals depending on a complex mix of age, NHS salary, non NHS earnings and personal pensions. Now is the time to be examining the impact and what, in practical terms, they can do about it.

John Ralfe is an independent pension consultant and formerly head of corporate finance at Boots. He can be contacted at johnralfe@johnralfe.com

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Annual tax returns - submit, or not submit?

By John O’Leary - 4th May 2011 10:28 am

If you have a private practice, you will need to submit annual tax returns.

If, however, you rely solely on your NHS salary, you may have received a cheerful letter from the Revenue (HMRC) stating that you no longer need to submit annual tax returns.

This has got to be good news hasn’t it? No, not necessarily. For one thing, should you have a tax liability the onus is still on you to report it to HMRC. This may seem a little surreal - you have a document saying that you need not submit a tax return, but this gives you no protection whatsoever in the event of having an unexpected tax liability.

The other thing to remember is that the tax return is how most of us claim for work-related expenses. We all know that the scope for claiming is small when compared to what you can do through a private practice, but you will still be paying for various professional subscriptions and your insurance, and these can be offset against your NHS income.

If you stop filling in tax returns you may soon find that HMRC ‘overlook’ your expenses and you are hundreds if not thousands of pounds out of pocket. You can inform your tax office that you wish to claim relief, but this can be a struggle.

So, being released from the self-assessment tax system could be a case of ‘one step forward, two steps back’.

John O’Leary is a specialist in the taxation of hospital consultants. He has recently joined Medic-Tax from Sheen Stickland, and can be contacted on jo@medictax.co.uk

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Private practitioners should check NI payments

By Rose Landinez - 14th February 2011 10:11 am

If you are a NHS consultant with a private practice, the next time you look at your bank statement you might like to check for payments of £9.60 every four weeks to the National Insurance people. If you are paying such sums (known as Class 2 NIC), there is a good chance your tax affairs are not as they should be.

Nearly all consultants will pay such a large amount of National Insurance on their NHS earnings that they are not required to pay any Class 2 contributions for their private work.

Whilst paying an unnecessary £125 a year is not a great idea, it points to a far larger problem with another sort of National Insurance where the sums can be really interesting - Class 4.

If you have not obtained deferment from Class 2 NIC, you will probably be paying Class 4 at a much higher rate than you should. These payments are made via your tax return. You could be looking at unnecessary payments in excess of £3,000 a year.

Thankfully Class 4 NIC can be reclaimed. Although hardly a simple task, it can be rewarding when a cheque for many thousands of pounds is delivered in your hands.

Having secured the appropriate refund, you will then want to ensure that the same problem does not occur in the future. If you do not have an accountant, a trip to the HMRC website will prove useful.

Rose Landinez runs Medic Tax, which are specialists in the taxation of hospital consultants. To contact her email info@medictax.co.uk

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Don’t be confused by the Revenue’s tax codings

By Michael Hankey - 10th November 2010 2:02 pm

All of us who work for a salary have a PAYE code which is, in theory, a way of making sure we all pay the correct amount of tax each month by deduction from our salaries. I say in theory because the practice can be very different and can produce some strange anomalies.

This is important because if it is wrong you could end up paying too much tax each month or, perhaps worse, you could find at the end of the year that you have underpaid and are faced with an unexpected tax bill.

In a normal year this can be bad enough but this year - since April - there are all kinds of other problems appearing.

Up until this year, everyone has received a flat rate personal allowance but now this varies with the level of your income with high earners losing theirs completely. As a rule of thumb, if you earn more than £100,000 your allowance will be restricted and if you earn more than about £112,000 it will disappear completely.

You may think that this doesn’t concern you as you don’t earn £100,000. Be warned, HMRC don’t always get it right - I have met with several cases recently where taxpayers earning nothing like that much were assumed to be high earners, often because they had a small second income from another source (such as occasional locum work).

This could mean you pay considerably more tax than you need to each month and, unless you take some action the position is likely to continue, particularly if you are still on a rotation and changing employers twice a year.

Even HMRC are now admitting that they are getting this wrong in a large number of cases, but don’t rely on anything you have overpaid being refunded automatically. It’s far better to take some positive action on your own behalf.

The moral of the story is to get some advice sooner rather than later because, as we all know, prevention is better than cure.

Michael Hankey is the tax team manager at Simpson Burgess Nash. He can be contacted on michael.hankey@sbnca.com

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Food and entertainment are off the tax menu

By Rose Landinez - 3rd September 2010 10:50 am

A common question from consultants is: “How much can I claim for food and entertaining?” At this point one’s heart sinks at the prospect of another tirade on how biased the tax system is against medics.

Clearly some doctors will need to explain how unfair the system is, how outraged they are that the expenditure does not attract tax relief, and how if they were running the country things would be quite different. They then settle down to explain just why HM Revenue & Customs have such a problem with entertaining and subsistence claims.

The basic principle is that a person pays for their food if they are not working, so why expect help from the tax system when someone eats on the job? The fact that people have to spend five times as much eating away from home or at their desk holds no sway with HMRC - the purpose of the lunch at Claridges was to obtain nutrition and what they were doing in London has no bearing on the matter.

We then move on to “taking some colleagues out for lunch to discuss cases, new practices, etc.” It is even harsher to deny relief under these circumstances, but HMRC will take the view that if it was necessary for a person’s employment to discuss such matters, the employer would make arrangements to cover the costs. The meal will therefore be viewed as a luxury that is not necessary to the performance of a doctor’s duties.

There are, however, some cases where food and entertaining can be claimed. If you employ secretarial staff, you may take them out to dinner and expect to obtain a tax deduction (as long as the annual value per person is less than £150).

If you are giving a presentation to a group of GPs, and hire a conference room and arrange a small buffet to supplement the presentation, this will normally be allowable.

Entertaining expenses are easy pickings for HMRC. If a consultant is in the habit of claiming the costs and normally get away with it, they could be storing up trouble. The rules on entertaining are fairly clear in most cases, so if you do claim in a gung-ho fashion the consequences can be dire.

Rose Landinez runs Medic Tax, who look after consultants in London and the south east. To contact her email info@medictax.co.uk

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