Do you really pay more tax in Scotland?

Here at Medics’ Money we love getting questions from our email subscribers (JOIN HERE https://www.medicsmoney.co.uk/ebook/) In this article we are joined by Elaine, Vihar and Colin from Mazars, Specialist Medical Accountants based in Scotland. They answer your questions on everything from ‘Do doctors in Scotland pay more tax” to “What is the impact of electing for scheme to pay and does it differ from Scheme pays in England?”

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We made a podcast on this here https://link.chtbl.com/8scottishtips

Do you really pay more tax in Scotland?

Unfortunately, yes we do unless you are earning £15,000 or less. If for example you earn £50,000, you will pay tax of £8,980 in Scotland but only £7,486 for the rest of the UK thus paying £1,494 more. If you earn £100,000, in Scotland you will pay tax of £29,480 but in rest of UK it would be £27,432 therefore paying £2,048 more. This is due to the fact that we have differing tax rates in Scotland as a result of the devolved government’s tax raising powers.

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I have an NHS Pension and have moved from England to Scotland. Are there any implications of this?

Generally, what we experience on this front are those moving north of the border, with continuing NHS service.

If you have continuous NHS service or re-joining with a gap of less than five years, you will receive broadly the same benefits on transfer from their former NHS scheme. The former scheme will calculate the transfer value and send the transfer details and payment to SPPA at the same time.

SPPA will check the calculation and input the transfer details on their pension system and then inform the member that the transfer is complete. Members should note that SPPA can only input the service which they have been provided from the former scheme. If you believe there’s a discrepancy in the information transferred, you should contact your former scheme directly as SPPA don’t have access to any record of your service outside of the transfer details they’ve provided.

If there is a gap of five years or more in your NHS service, the benefits will be calculated on a different basis and the member be provided with an estimate of what benefits the transfer value will purchase in the new scheme. SPPA will provide an estimate and options forms so that you can make a decision. You may wish to take independent financial advice at this stage.

Added years contracts are transferable as long as you don’t have a gap of 12 months or more between employments. You’ll need to transfer to allow any added years contracts to continue. You should note that NHS employers / payrolls will not be able to make any deductions until SPPA confirms that the transfer has been completed. You should be aware that this could result in arrears of these contributions.

Lastly should also point out that transfers may potentially lead to Annual Allowance issues, in the year of transfer! As mentioned previously, if anyone is unsure as to whether they should transfer or not, then they should seek independent financial advice.

What is the impact of electing for scheme to pay and does it differ from Scheme pays in England?

In explaining scheme pays, quite simply this is where an individual’s annual pension contribution has exceeded their pension Annual Allowance, and an annual allowance tax charge has resulted. Rather than playing this as a charge via their tax return, they can elect for the pension scheme to pay this from their accrued benefits. This charge effectively sits as a debt against the scheme until such times as the member retires, and results in a reduction of benefits paid at that time. This is effectively a “Loan” whereby interest will be charged, with the loan being repaid back when the member retires. The total amount owed, including interest, is then converted to permanent reduction in NHS pension, using actuarial factors provided by the scheme actuaries.

One last point to mention here, is that if a member with an excess annual allowance charge has a separate money purchase, or defined contribution scheme, then using that particular scheme to facilitate the charge, rather than the NHS Scheme, can be considered. Thus allowing the benefits to accrue in the NHS Scheme. Again it would make sense to seek independent advice, if this were an option.

What should I do in relation to the McCloud/Sargeant Judgement?

At this moment in time (October 2021) – nothing! It’s not actually in legislation, as yet! What I would say is, basically, in general this is a good thing, for all members. Individuals will either be in a better or no worse position, as a result. I can appreciate that people will have lots of questions, however as there are no worked examples to go by, all I can say is that individuals will likely require lots of advice to determine the best option for them. Just to reiterate this is a good thing, and should be seen as such.

What do you think concerns GP’s most just now?

Interestingly we have just carried out a client survey which covers this topic and so far over 60% of the responses have given lack of resource to meet patient demand as their biggest concern. There is a shrinking number of partners in GP practices. For example a practice who might have operated with 5 GP partners a few years ago, may now only have 2 and there is a shortage of locums. It does vary region to region, but supply of GPs feels really low and recruiting partners is a huge struggle which leads to not having enough GP resource to meet current patient demand but also succession planning issues or preventing early retirement and it increases the possibility of mergers of practices. One of the other significant concerns is that of the future of NHS funding and what it is going to look like. We are currently waiting to see what Phase 2 of the new contract in Scotland is going to look like and there is not much information currently available. This does cause nervousness for GP’s as they just cannot predict at present what their income is going to look like going forward under the Phase 2 model.

I am a newly qualified locum, what do I need to be aware of?

As a locum, you will be considered to be self-employed and therefore will have to pay tax via self-assessment on your earnings. The most important point is to make sure you set aside sufficient funds to cover your tax and I would usually advise setting aside 30-35% of all earnings. You will have to register with HMRC for self-assessment and this should be done by 5th October after the end of the tax year in which you became self employed. Therefore if you started as a locum in August 2021, you will have to be registered with HMRC by no later than 5th October 2022 and your first tax payment will be January 2023. You will pay tax at two points in each year from 2023 onwards – January which consists of balancing adjustments and the first payment on account towards the next year’s tax and July which consists of your second payment on account. You should keep a log of all income earned and also all receipts for any allowable expenses such as professional subscriptions, professional equipment and courses and these records have to be kept for 7 years after the end of the tax year. In terms of superannuation, you pay this on a monthly basis by making payment to Practitioner Services and you have to complete locum forms a and b for each practice that you locum for in order to declare your superannuable income.

As a newly qualified GP with a mortgage, student loan and high outgoings, is it still beneficial for me to join the pension scheme given that I am hearing of horrific tax liabilities in relation to pensions?

Firstly what I would say here is that everyone’s individual circumstances are different, however being newly qualified, it’s highly unlikely they’d be caught by horrific tax charges. By engaging with an accountant and/or financial adviser, this is something that can be monitored and managed.

In the main if it’s affordable to join the scheme, I would focus on the positives, and the fact the NHs scheme is one of the best in the UK, and focus more on that together with the other scheme benefits, linked to Death in Service and ill health. Being newly qualified with a mortgage, and possibly a young family, considering individual protection needs, is also important, and again something that should be discussed with a financial adviser.

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Should I set up a Limited Company for my earnings?

We hear this question a lot and the honest answer is that it depends on your circumstances. A key point to note is that a limited company is its own legal entity meaning that any money held in the company name is company money and therefore in order to withdraw that money, you then either have to draw a dividend or salary which you are taxed on over and above the corporation tax. The forthcoming national insurance and dividend tax rate changes means that the marginal benefits of having a limited company and drawing dividends has been eliminated. There are also legal filing requirements for limited companies meaning that official accounts have to be prepared and submitted to Companies House and are held in the public domain. Finally, by putting NHS income in to a limited company, you then lose the ability to pension this income as there is no longer a direct contract with the NHS.

Contact Elaine for accounting advice here 

https://www.medicsmoney.co.uk/accountant/mazars-llp-scotland/

Contact Vihar and Colin for financial advice here 

https://www.medicsmoney.co.uk/accountant/mazars-financial-planning-scotland/