What's up Doc?
Yet again GP's face further changes that will reduce their income when the Finance Act 2009 comes into force in April 2010. Rosemary Smith, a senior healthcare manager, Whittingham Riddell LLP goes through some of the changes and how these will affect GP's.
From 5 April 2010 a 50% income tax rate will apply to earnings over £150k. At the same time you will no longer be eligible for the individual tax free personal allowance of £6,475 in the current year, representing a tax saving of £2,590. As most GP’s annual income exceeds £100k the allowance will be reduced to nil by £1 for every £2 of income over £100k – by the time your income reaches circa £113k any eligibility for personal allowance is lost. The marginal tax rate for GP’s earning between £100k and £113k will be 60% - a large number of GPs will fall into this tax bracket.
With the ongoing changes in your income it is very difficult to measure income accurately before the start of the year making it all the more important to seek good tax planning advice so that you remain below the £100k threshold.
If your income is likely to fall into this category you may want to rethink what you are doing, could you put some of your income into a limited company? This would work well for non-superannuable income. Small companies, with annual profits of less than £300k will pay tax at 22% from April 2010, currently 21%. GPs could make a massive tax saving of 28p in the £ if services were delivered through a limited company, thus keeping your annual personal income under £150k.
You could still plan to extract those profits from your company, and may face an additional income tax charge to do this, but if this is the top slice of your income and you have some flexibility on when to make the drawing, then you have some options to mitigate this tax. Could you share income with your spouse, or look at company pension funding, depending on your NHS pension funding and how this fits into the pension framework. Profits accruing in the company could be additional funding for your retirement.
If you haven’t got the non-superannuable income or don’t want to make a permanent annual tax saving using a company, you might want to think about planning your income around 5 April 2010. This may be a good opportunity to bring income back into an earlier year and pay the tax earlier at a much lower tax rate.
And then to make matters worse from 6 April 2011 tax relief on pension contributions for those with annual earnings greater than £150k could be restricted to the basic income tax rate, currently 20%. There are complex provisions to ensure individuals likely to be affected do not achieve significant tax relief by making sizeable pension contributions prior to the introduction of the legislation.
The good news for GPs is the tax relief on contributions to the NHS pension scheme are not affected by the proposed legislation because this type of defined benefit scheme is protected against the impact of the legislation. However if there were to be a significant changes in the rules for calculating benefits, this protection could be lost at great cost to GPs.
Any additional contributions, such as the purchase of enhanced pension provision or a late entrant for the purchase of added years, would not be protected if started after 22 April 2009. So watch out for that one!
Also GPs paying into personal pension schemes, over and above their NHS pension scheme contributions, need to obtain independent financial advice from an adviser who understands how GPs pension provision work.
There are also changes on the capital allowances front with changes to cars bought after 6 April 2009 as tax relief depends essentially on three CO2 emission based bands:
Cars up to 110 g/km attract 100% relief
Cars from 111 - 160 g/km attract 20% annual allowance
Cars in excess of 160 g/km will only attract 10% annual allowance.
Remember the annual allowance is restricted to the business use percentage. In other words if you are a 40% tax payer, with 50% business use of your vehicle which has emissions exceeding 160 g/km then the tax saved in the year of purchase will be £2 for every £100 spent! Definitely time to think greener!
Lastly changes to furnished holiday lettings. From April 2010 any losses will no longer be allowed to be offset against other income as it will be considered a trading loss and have to be carried forward against future profits of rented properties. So lots of potential attacks on your income in this year’s Finance Act!
Rosemary Smith, Senior Healthcare Manager, Whittingham Riddell LLP rs@whittinghamriddell.co.uk
