In this broadcast, Laurence Slavin reviews the annual allowance problem, PCN Incorporations, Basis Period Reform and our Pension Info Report.
My name is Lawrence Slavin. I’m a partner of Ramsay Brown Chartered Accountants and this is one of a series of broadcasts that we make to keep our clients and other people interested in what we’re talking about. I’ve been working with consultants and GB clinicians for over 30 years, which means that I hope I’ve learned a lot.
The main thing I want to talk about today is the annual allowance, and we’ll talk about that and how that’s going to work and what that means. Before we get there, just very briefly, a couple of points. PCN, I saw this article in GP Magazine saying more than up to PCN of four limited companies. I’m not surprised and I think probably I’m surprised the number isn’t more than that. There are good reasons to incorporate, become a limited company. You have control over your surplus, you have a proper corporate structure in the company, director’s status is clearly unequivocally stated, you have a limited liability entity, you have a separate entity that exists rather than just a group of practices working together, PCN seem to be growing in size. But I think this is probably a very good idea. And if you want more help and support and advice about whether or not your PCN should be incorporated, then by all means get in contact with us.
This is period reform. Again, very briefly, you’re going to be forced to move your year end to 31 March or 5 April if your year end isn’t already. And if you don’t have a year end of 31st March or 5 April there is going to be a significant impact on your profits by doing this. So this is a pretty penal measure. It’s going to be coming in in the tax year 2023/24. The reason for mentioning it now is that if you’re not a March or 5 April year end, you probably may well be a 30 June year end. Which means that the profits from the 1 July 2022 will be those that are used to calculate the transitional profits in 2023/24 and you need to plan and think very carefully about what it’s going to mean for you and how you’re going to manage that. The reason I’m mentioning it now is I’m still meeting practices who have year ends that are not 31st March/5 April and are not aware of basis period reform. So I’m bringing it to your attention now. Junior end. Then you need to be thinking about what you’re going to do pretty soon.
Allowance. Okay, this is the main thing I want to talk about today and I want to talk about it in such a way that it is not too over technical and I want to explain what you need to do about this and what you should be thinking about. So here’s just four questions in the statement, I suppose, and I’m just going to talk over them.
What’s the annual allowance? This is how much your pension is allowed to grow before you have to pay a tax charge on it. Importantly, it only applies to people who are active members in the scheme. So if you are not contributing to the scheme, if you’re a deferred member for all of 2022/23, then you will be exempt from the annual amount of charge. And I must say that I should have said earlier, but I’ll say it now and I’ll probably say it later, nothing I say is advice. This is just giving you information in order for you to make a decision if you think it’s appropriate. Or even better, to go and get advice from a financial advisor, this is just information.
How much can your pension grow in the year before you have a tax charge? Answer: £40,000, unless you are a particular high earner, in which case they reduce your annual allowance. Now, the way it’s calculated. I’m going to talk about the way it’s calculated. It’s calculated by taking your pension position at the beginning of the year and comparing it to the end of the year. This is taken directly from the NHS BSA website. They take the opening position for your pension, multiply it by 16. If you have a lump sum that’s also added into it. And then you see at the bottom there, the total amount is adjusted in line with inflation. Inflation, which would be around 3% for 2022/23. The closing position, we can compare it to the closing position. We calculate your pension the last day of the pension period. Now, your pension will have been increased by the effect of CPI during that year. And the NHS pension scheme used the CPI at the end of September, when we’re looking at an inflation figure of around 10%, so you then take the closing position. From that, you deduct the opening position and that’s the growth that’s worked out in your pension.
So, let me show you what I’m talking about. This is a calculator produced by this company, Medi Fintech. We work closely with them. The Pension Information Report that we’ve been talking about in previous broadcast is prepared in association with them and they produced this calculator which a variation of which has been released by the BMA. So, let’s have a look at this. Let’s take a simple situation of a member of the pension scheme already got £40,000 plugged in their pension.That’s what they’ve earned so far with pension pay of £80,000 CPI in September 22, likely to be around 10%. So what we’ve now got is 8%. We’ve got growth for that GP of £48,000, which is £48,000 over the top of their allowance. That £48,000 will be taxed at either 40 or 45%, depending on their tax rates and if you look at the detail here, £62,000 of growth comes from the 95 scheme in which there are no contributions being made because they will be moved into 2015 scheme.
So this is just the effect that inflation. You might think, well, maybe I should get out the scheme as soon as possible. And again, this is not advice, of course, but actually the calculations we’ve done don’t suggest that is a good idea necessarily. Let’s supposing you’re a young GP with particularly higher pension that you’ve earned so far, but you’ve got £15,000 in your pension, you’re only 80,000 miles of pensionable income. Well, then you haven’t really got much of a problem £49,000 compared to the amount of £40,000.
The other hand, let’s suppose in your pension, you’ve got £70,000 in your pension and actually you’re just doing one or two sessions, pension will pay £25,000. You’ve got a massive problem because the value of your fund so far is very high. So what this has told me is that there is no single piece of advice that you can give to mitigate this tax charge. Every single case is going to need to be looked at on its own merits. And actually, when I was thinking about this last night, what this proves is it is a really bad tax. And actually, if it’s a bad tax, then someone should be making a fuss about the fact that it’s a bad tax.
So I’m not talking about a Zealots Revolt or the Boston Tea Party, all of which were bad tax policies, but this is clearly a bad policy and it needs to be corrected. And in fact, if you look at the following year, when CPI would hopefully be falling because we’ve got control over our economy and inflation, it saved 5% in September, 23, and this is probably not a great example, let’s say £100,000 of earnings, there’s only growth of £30,000 with this person with £70,000 in their scheme and £100,000 worth of earnings, so no problem in this year. Massive problem in last year.
So the thing to do, I think, is to know where you are. In our pension report, which I’m going to show you very quickly, which these are just extracts from it, which we have worked with this company MediFintech to produce. It will give you a summary of your pension and your allowance with a lot of information and perhaps that’s a good place to start to determine what it is that you’re going to need to do to make plans. Lastly, I thought I’d just talk about this case that came up and I think I mentioned in one of my previous broadcasts. Accountancy is not a regulated profession, so anyone can call themselves an accountant. But you can’t call yourself a chartered accountant or a certified accountant, you have to be properly qualified to do that and just to reassure you, we are a firm of chartered accountants and what happened in this particular case was that this accountant offered his services to people working on the North Sea Oil rigs and he prepared their tax returns for them and he made all kinds of claims for investments that they hadn’t made and had arranged for any tax refunds to come back to him, which they did, which he pocketed and he has now, of course, been arrested, but the taxpayers who had these returns prepared for them were responsible, of course, because they signed those tax returns saying they were responsible and they’re having to get out of a bit of a hole now with HMRC.
So, just a word of warning. If you’re not a client of Ramsey Brown and you’re not sure your account is properly qualified, it would be a good idea to check. That’s the end of this month’s broadcast. I hope you found it useful. If you got anything you want to ask us about or talk to us about, then our details are on this report and you’re more than welcome to contact us. For now, I’ll say goodbye.