Money Matters

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

New tax changes for higher earning doctors

By Justine Roberts - 21st April 2010 11:05 am

We are in a new tax year and are shortly to have a new government in power. We do not know who it will be, but in many respects it is going to make little difference. There are already a raft of tax changes that have just taken place at the start of this tax year or will commence at the beginning of the next tax year.

Any new government is able to reverse tax increases or stop them being implemented, but pragmatically this isn’t going to happen. With the economy in such massive debt any tax increase that can be blamed on a former government will not be changed as any new government will need to raise extra finance anyway!

The major headline grabbing change is the introduction of a new higher rate tax band of 50% for all those who have taxable income over £150,000. Perhaps as important but lesser known is the changes to pension tax reliefs.

Many of the changes to pension tax relief do not come into effect for a further year. However, it is easy for any doctor making pension arrangements to fall foul of these rules early.

From 6 April 2011 anyone with ‘total’ earnings over £150,000 will no longer receive full higher rate tax relief on pension contributions. A doctor earning £130,000 in the NHS will have a total income under this assessment of £159,250 after all pension contributions are added back in, meaning that higher rate relief is in part lost.

When these rules were introduced there were also ‘transitional rules’ that came into being to ensure that higher earners did not make large pension contributions in this tax year in order to avoid the rules.

So what does this mean to a doctor?

All doctors earning over £150,000 will from the beginning of the next tax year lose higher rate tax relief on pension contributions. This applies to the NHS superannuation plus any added years, additional pensions, AVCs or personal pension arrangements.

It is therefore in the best interests of doctors who find themselves in this situation to cease any additional pension planning from the beginning of the 2011/2012 tax year. There is no point making a pension contribution that only receives basic rate tax relief to then have to pay higher rate when it is received in retirement.

Doctors who currently earn over £130,000 should be very careful about making any additional pension arrangements from now. It is highly likely that higher rate tax relief will be declined on any new arrangements that are made.

With the changes in taxation taking place we will all pay more in tax, however higher earning doctors should be especially careful with their pension arrangements as they could well prove to be more expensive and less tax efficient than expected.

Justine Roberts is a director of Medical & Financial Ltd and can be contacted on 01400 250525 or at justine@medicalandfinancial.com

Tags: ,
Posted in Money Matters | No Comments »

Don’t get caught out by the tax man

By Michael Hankey - 14th March 2010 2:59 pm

Her Majesty’s Revenue and Customs (HMRC) regularly carries out concentrated operations on various groups of taxpayers whom they suspect of making incorrect returns of their income.

The latest group to come under the microscope are doctors and other medical professionals.

Under the Tax Health Plan, which was announced in January, doctors and dentists who have failed to disclose all their earnings have until 31 March 2010 to notify HMRC that they wish to make a disclosure. They then have a further three months to 30 June to submit it their disclosure and make full payment.

All the HMRC needs to begin an enquiry into an individual’s tax affairs is a ‘suspicion’ that there may be items declared incorrectly or not declared at all. It is then up to the taxpayer to prove them wrong - ‘innocent until proven guilty’ does not apply to HMRC enquiries.

It can get even worse. It is often the case that if something makes HMRC think a taxpayer does merit an enquiry, they will not stop at a single year. The current year and the six previous years can all be brought into consideration.  

You are probably now thinking that this could not apply to me but think again. Have you declared all the money you have received from cremation form fees and similar items? What about locum work? Have you declared all of it on your tax return?

 You might be thinking that because your locum agency work was taxed at source you are in the clear - think again, it might not be taxed at the correct rate leading to an underpayment of tax. Remember, this is your responsibility not the taxman’s nor the agency’s.

Come to that, have you completed tax returns? If you have extra income the responsibility is on you to make the declaration not upon HMRC to ask you to do so.

It isn’t all gloom and doom. There may be items which you can claim against your tax which you haven’t thought about. You may even have been overpaying tax in your main job which happens more than you might think.

If you are in any doubts at all, go and ask for some professional help in looking at your tax affairs - it could well soften any nasty shocks and you may even be pleasantly surprised!

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

Tags: ,
Posted in Money Matters | 1 Comment »

Start early when it comes to financial planning

By Justine Roberts - 11th December 2009 10:19 am

The start of a doctor’s career is unlikely to be a time where long term financial planning is at the top of the to-do list, however putting simple planning measures in place early can make a tremendous difference to longer term financial well being.

Doctors will begin their careers in different positions financially although some degree of debt is likely to feature for most. Once working, initial advice is to use some of this income to pay off debt and build up a solid base financially through short term savings. Cash ISA investments are ideal for this, they are tax free and from next tax year allow saving of up to £5,100 in each tax year.

A solid financial base is especially important in the current climate with lending restrictions meaning a substantial deposit is necessary to gain good terms for a mortgage.

The second consideration is protection, protecting oneself financially from the impact of ill health and protecting any financial dependants from the financial impact of premature death. All forms of health related cover is expensive whether this is income protection or critical illness. The costs of these covers increase the older one is when the cover is taken out. For this reason making proper provision early in a career will save a significant amount of money in the long term.

Income Protection provides a replacement income in the event of ill health and can be tied in to coordinate for when the NHS sick pay ceases. Doctors taking out income protection should be wary; many policies are arranged on a “reviewable basis” which means the insurer can increase premiums throughout a doctor’s career. These policies are generally cheaper at outset but are false economy in the longer term. A “guaranteed” policy ensures a known cost through life.

If disposable income is available, long term saving and pensions are at their most effective if they have time to grow. A rule of thumb for pension planning is that for every five years planning is deferred the amount that has to be invested is doubled. Even a small commitment in the early years can make a tremendous difference.

For savings the ideal vehicle is an equity ISA, this provides a tax efficient exposure to the stock market. For pensions, personal pensions provide flexibility to stop contributions if necessary as circumstances and commitments change and the additional pension from the NHS route provides a certain return, however aren’t as flexible.

Following these simple planning rules early in a doctor’s career will save money in the long term.

Justine Roberts is a director of Medical & Financial Ltd and can be contacted on 01400 250525 or at justine@medicalandfinancial.com

Tags: ,
Posted in Money Matters | No Comments »

Is your private practice secretary self-employed?

By Rose Landinez - 26th October 2009 11:18 pm

Many consultants use their NHS secretaries to assist with their private practice administration. All too often the secretary is treated as being self-employed, with their fees paid on receipt of a monthly invoice.

Were HMRC to look into the arrangements, they would almost certainly insist that the secretary was fulfilling the role of an employee rather than a self-employed worker. It does not matter that you may pay varying amounts month by month based on hours worked or letters typed, or that the secretary “works for three other consultants so must be self-employed”, the fact is that the consultant is providing work on a regular basis and the arrangement bears most of the important badges of employment.

HMRC have several tests to weed out the employed from the self-employed, such as the requirement to receive sick or holiday pay, the right to provide a substitute worker, etc. It is not a question of simply ticking off boxes - if you have a steady arrangement with someone who works for just a few people, the position risks being classed as employment.

From a tax point of view, both consultant and secretary would much prefer to be dealing with a self-employed arrangement. The consultant would be spared the hassle of running a payroll and would not need to account for employers National Insurance Contributions, while the secretary would pay a lower rate of NIC and would be claiming for expenses that are not available to employees.

Unfortunately, what we would like and the correct way to proceed are often quite removed. Anyone continuing with such an arrangement is taking a risk. The worst case scenario would be for HMRC to insist the secretary should have been treated as an employee, and the gross amount paid by the consultant is viewed as a net salary, with the consultant being held liable for the tax and NIC that should have been deducted.

If you are caught in this sort of situation, you need to look at setting up a payroll or to give up on your secretary and use the services of an agency or a secretary who is clearly self-employed. The final option is to continue on current lines and to keep looking over your shoulder - you have been warned.

Rose Landinez runs Medic Tax. To contact her email rl@medictax.co.uk

Tags: ,
Posted in Money Matters | 1 Comment »

Financial planning: revisit your income protection

By Justine Roberts - 6th October 2009 1:09 pm

Over the next couple of blogs we will pick up on each area of personal financial planning and why it’s important to keep it reviewed. We will start with income protection.

In the current economic climate it is more important than ever to ensure your finances are up to scratch, especially the protection areas of financial planning.

We recommend that all consultants review their financial circumstances at least annually, whether this be a meeting with an adviser or a quick chat on the phone. This is time well spent ensuring products have competitive charges and still meet with expectations.

Many protection policies are now cheaper than they were years ago, and as circumstances change the levels of cover required alter as well. This may mean a need for more cover if income and commitments have increased, or indeed sometimes amounts of cover need to be lowered if the children aren’t dependent or there are no costly school fees to cover. Many of us unwittingly risk our lifestyles by having inadequate, inappropriate or expensive policies.

Income protection provides a tax free income in the event of illness or incapacity if unable to work through illness or accident. There are limits on how much cover a consultant can have but private practice income can also be insured as well as NHS income.

Most consultants will have six months full pay and six months half pay from the NHS if incapacitated (providing they haven’t had a break in service for longer than one year in the past five years) and income protection can be dovetailed into these benefits. Many consultants will have first taken out income protection when they were a junior doctor; since then income and circumstances will have changed, not to mention the changes in April 2008 in the NHS Pension Scheme, with particular regard to retirement through ill health, which now means that most doctors who may need to claim on it in the future will be significantly worse off.

Income protection comes in two types, guaranteed and reviewable. A guaranteed policy provides certainty as premiums are fixed at outset, although premiums and benefits generally rise with inflation each year. Reviewable plans are generally cheaper at outset but are subject to periodic changes in premiums, often every five years when companies assess whether the premium being paid is sufficient to provide the cover. If the answer is ‘no’, then costs can rise significantly. Guaranteed policies are therefore preferred by most as they offer more security.

Not all companies will cover consultants for their own occupation, so choosing the correct company not just on cost but on their terms and conditions is paramount to try to ensure that any claim will be paid.

Justine Roberts is a director of Medical & Financial, which provides independent financial consultancy to doctors. Contact her at Justine@medicalandfinancial.com, or visit www.medicalandfinancial.com for more information.

Tags: ,
Posted in Money Matters | No Comments »

It pays to keep an eye on National Insurance

By John O'Leary - 29th August 2009 12:50 am

National Insurance is basically a simple tax, but one that is often overpaid by hospital consultants.

The chances are that if you are an NHS consultant, you will be paying most of the required National Insurance via your NHS salary (Class 1 NIC). If you have a private practice you must complete the appropriate deferment forms, otherwise you will be asked to pay additional Class 2 and Class 4 contributions.

The Class 4 contributions are assessed via your self-assessment tax return. Most consultants can do little to escape the 1% Class 4 charge on earnings, but things are normally amiss if they are paying the main 8% charge.

Class 2 National Insurance is often wrongly paid, but not picked up by the accountant as the demands go straight to the taxpayer. The chances are that if you are an NHS consultant with a private practice and are getting regular small NIC bills (or an annual bill for around £100) you have not completed the appropriate forms and should do so as soon as possible.

Take a little care with NIC and you will not have a problem. Fail to deal with some simple paperwork and you may be paying hundreds (if not thousands) of pounds when you do not have to.

John O’Leary is head of medical taxation at Sheen Stickland LLP. Contact him on joleary@sheen-stickland.co.uk or 01420 83700.

Tags:
Posted in Money Matters | No Comments »

Eight tips on planning a comfortable retirement

By Simon Dickerson - 20th August 2009 2:36 pm

The NHS pension scheme continues to be one of the best pension schemes available, providing a pension and a lump sum at retirement, along with spouses and dependents benefits. The scheme is heavily subsidised by the NHS which contributes 14% of pensionable pay into the scheme.

These benefits form the foundation of pension planning; however with many consultants having significant private income it is important to consider other arrangements to supplement the basic pension. Consequently there are important decisions to make when considering how best to boost pension provision.

1. Start early. For every five years of delay in funding a personal pension future premiums should be doubled. Eventual benefits and the cost of these benefits is dependant as much on the amount of time invested as the amount invested.

2. Consider your options. Pension planning can take many forms. Buying additional pension benefits through the NHS, personal or stakeholder pensions, investing in property or utilising other investments. Look at your own personal circumstances to decide what is right for you and take advice.

3. Review regularly. Review your existing provisions at least annually. As income, family circumstances, personal requirements or legislation change it is important to ensure plans in place remain appropriate. Contributions should be increased in line with increased earnings over time. It is easy for income to rise over time and for pension contributions to be left behind.

4. Compare charges and performance. Pension charges have reduced over the years, so keeping abreast of how competitive your pension is with respect to charges and performance is imperative.

5. Diversify. Ensure that you don’t have all your eggs in one basket. Retirement planning doesn’t have to mean pensions. Pensions provide the most tax efficient route to plan towards retirement but are not without restrictions. Investing into ISA’s, may not give the same tax benefits at outset but generally is tax free at retirement and allows access to greater capital sums at retirement than one would normally get from a pension.

6. Tax implications. Consider both you and your spouse’s tax status now and in retirement. Having all income in retirement from one spouse is unlikely to be tax efficient. Try and equalise incomes to ensure that both partners make best use of any tax allowances.

7. Be Realistic. It is often necessary to invest 15% of income or more to enjoy a financially secure retirement. For consultants working privately it costs approximately 20% of taxable private earnings to replicate the benefits that the NHS pension scheme offers.

8. If you can’t retire when you want to, aim to retire later. Normal retirement age for the NHS pension scheme is 60, retiring sooner than this can prove to be very expensive as benefits are reduced. For consultants working beyond 60 there are few reasons not to take pension benefits. Any increased benefits for working beyond 60 are overshadowed by the pension income that could have been received and has been lost.

● Simon Dickerson is a director of Medical & Financial, which provides independent financial consultancy to doctors. Contact him at simon@medicalandfinancial.com, or visit www.medicalandfinancial.com for more information.

Tags: ,
Posted in Money Matters | No Comments »

Employing your spouse in your private practice

By John O'Leary - 14th July 2009 7:24 am

The logic behind employing your spouse in your private practice is often sound - if you look at a couple as a whole, you are likely to pay less tax if you can spread the income between you both so as to utilise two sets of personal allowances and basic rate tax bands.

If you are a high earning couple, for example married consultants both on 40% or 50% tax rates, there is little to be gained from going down this route, but for others it can be a useful planning tool.

If a spouse or civil partner is employed in the business, care must to be taken. It is important that their services can be justified (i.e. are they worth what they are paid). You cannot simply create a role on paper for your spouse and then pay a salary.

In practise, however, it is rare for the spouse of a consultant not to help out to some degree - they may well perform receptionist/secretarial duties, help with banking matters, do a spot of bookkeeping etc. Such services should be rewarded with a reasonable wage.

Another issue concerns payment arrangements. Far too often a spouse will perform a vital role in the practice, be paid a reasonable wage via the PAYE scheme, but because the payments have not been handled correctly the consultant will be denied the expected tax relief.

It is vital that the wages of a spouse are paid by standing order into an account in your spouse’s name. Should your payments be made into a joint account or be made in cash, HMRC have the power to treat the payments as not having been made and can deny you the appropriate tax relief.

If the payments are less than the personal allowance (currently £6,475), there is no need to set up a PAYE scheme as long as your spouse does not have another job. Should their salary be greater than the allowance or if it is possible to obtain NIC credits for the spouse, you will need to register with HMRC and go through all of the PAYE hoops regarding tax, National Insurance, end of year returns etc. In practice many consultants simply get their accountants or a payroll bureau to relieve them of the hassle.

It is not uncommon for the services of a spouse or partner to command a salary in excess of the tax and national insurance thresholds. When this happens, the downside is often that national insurance (paid both by the employee and the employer) leaves the couple worse off than if they had paid a low salary.

There are ways around such issues, for example through the creation of a partnership (there is a lot of misunderstanding about partnerships – many accountants will say that husband and wife partnerships will be attacked by HMRC, whereas if things are handled properly you should have no problems).

For the majority of consultants, utilising their spouse in the practice is a practical way to save tax – but make sure that you do not get caught out by the small print.

John O’Leary is head of medical taxation at Sheen Stickland LLP. Contact him on joleary@sheen-stickland.co.uk or 01420 83700.

Tags: ,
Posted in Money Matters | No Comments »

Change in ISA rules encourages investment

By Justine Roberts - 6th July 2009 9:59 am

Last year the ISA rules changed, but many investors are not sure of how these changes affect them. Everyone can invest up to £7,200 in an ISA this tax year and any income and capital growth are tax free, which makes them a very attractive form of investment planning for consultants.

From October 2009, any individual over 50 sees their allowance rise to £10,200. This increased allowance applies to everyone else with effect from next year for the 2010/2011 tax year.

If a consultant invested the maximum allowance of £7,200 into ISAs each year, over 10 years, they could be worth in the region of £106,048 at the end of the decade, assuming average charges and an annual growth rate of 7%. This can then be taken as a lump sum free of any tax. Consultants often use ISAs as a useful tax-planning tool to boost retirement benefits.

Mini and Maxi ISAs now no longer exist, having been replaced by cash and stocks and shares ISAs. The entire annual ISA allowance can now be invested in stocks and shares. Any combination of cash and stocks and shares can be used, providing the investment into the cash ISA does not exceed £3,600. This rises to £5,100 next tax year when the overall maximum into ISAs increases to £10,200.

Transfers from cash ISAs to stocks and shares ISAs will now be permitted. The correct procedure must be followed when switching ISAs, as you cannot draw the money out and then reinvest it for the same tax year, but you can transfer the ISA to another provider. Any old PEP investments are now stocks and shares ISAs.

Consultants should consider various factors when deciding which ISAs are right for them and if the stock market is the right place to invest. Investment risk, the period of investment and whether income or growth is required are fundamental questions that need addressing.

If investing in the stock market there are thousands of funds to choose from and deciding which funds to invest into can be a minefield. Investors should be aware that investing in the top performing fund one year is not necessarily the right thing to do, as many high performing and headline grabbing funds are extremely volatile and suffer periods of significant loss.

Investing in funds that have clever advertising to draw in the investor should also be avoided. Another pitfall is following trends, as they are often not such a good investment as first thought, as was proved with the technology boom.

Before deciding on specific funds investors should consider what level of risk suits their circumstances. In essence if the market goes down how much of the investment are you prepared to lose and how long are you prepared to stay in the stock market to ride out the volatility. There is a correlation of risk verses reward; the greater the investment risk the greater the potential return.

Consultants should also consider diversifying their risk and not invest everything in the same investment company, fund or possibly even the same type of asset. It is not necessary to invest in equities to invest in an ISA.

The stock market can be a volatile place to invest as has been evident over the last year, where we have seen the FTSE 100 index fall by 24%; however within that period we have also seen periods of sustained growth in excess of 30%. This is where time also becomes a factor, if an investment can be left to ride out these downturns and given time for the value to rise again, then the volatility may not have any significant effect on the investment. It is important to remember that no money has been lost and no growth has been gained until an investment is surrendered.

Trying to second guess the market can be a high risk strategy, investing when the market is low is of course a good idea however we only know with the benefit of hindsight whether the market falls further. Investing on a monthly basis buys units at a different price every month, thereby averaging out the cost of the investment over its term. As the markets are still relatively low, investing in a stocks and shares is still considered a good opportunity for most who are prepared in invest for the medium to long term.

Once all the facts have been established it narrows the investment choice and will be easier to find an appropriate investment. For example, a low risk investor who does not want to risk losing their capital should not consider investing in the Japanese smaller companies sector, but may well consider a cautious managed fund. Once the risk profile is established appropriate funds can then be sourced, ensuring that these funds have a consistent track record in performance, with solid independent industry ratings and an experienced fund manager who matches the particular investments objective. Seeking qualified advice is always prudent.

Justine Roberts can be contacted at justine@medicalandfinancial.com or visit www.medicalandfinancial.com

Tags:
Posted in Money Matters | No Comments »

Pros and cons of Additional Pension scheme

By Justine Roberts - 4th June 2009 5:12 pm

Most consultants who have worked in the NHS will be aware of the Added Years scheme, which was replaced by the Additional Pension scheme in April last year.

The Additional Pension scheme offers considerably more choice and flexibility than the Added Years scheme. Benefits are purchased in tranches of £250 up to a maximum additional pension of £5,000 per annum. These benefits are index linked each year. There is no automatic tax-free lump sum; however this can be taken by commuting part of the pension.

The benefits purchased are known from outset. The cost of purchasing is fixed for the first four years, after this they are subject to a regular review where costs may be increased. It is possible to purchase benefits in one of two ways, either through a lump sum payment or via a monthly payment plan. If payments are made monthly the member can choose to pay over any period up to 20 years, although payments must cease by normal retirement.

It is significantly cheaper to purchase benefits via a lump sum. As an example, a 45 year-old-male doctor, purchasing £1,000 per annum in extra pension, would pay a total of £19,872 if he chose to pay over the 15 years until retirement. If those same benefits were purchased as a lump sum the cost would be £12,880.

Unlike Added Years, under the Additional Pension scheme a consultant has the option to choose not to purchase periphery benefits that would not get used. For example, a pension can be purchased without spouses benefits if these are not appropriate. The new scheme also differentiates between male and females. Although this does make benefits more expensive for female applicants.

It isn’t all good news however. As predicted the cost of the new scheme is significantly greater. A 40-year-old male will pay in the region of 6% more for the same benefits under the new scheme, and a 50-year-old male closer to 14% more. The cost for female doctors is greater still.

Spouse and dependant benefits are also reduced. Added Years provide spouse and dependant’s pensions, but the new scheme has an additional charge to add on these benefits.

So, the Additional Pension scheme is significantly more flexible than its predecessor but the downside is the cost. For many the old scheme was expensive, but the new scheme is more expensive still.

However, in times of investment uncertainty the guarantees provided will be attractive to many.

● Justine Roberts is a director of Medical & Financial, which provides independent financial consultancy to doctors. Contact her at Justine@medicalandfinancial.com, or visit www.medicalandfinancial.com for more information.

Tags:
Posted in Money Matters | No Comments »