Accountancy Services

Doctors and Tax (all tax figures are based on the 2007-08 tax year)

Doctors in Employment

As all employed doctors will be aware, before receiving their net pay, tax is deducted from their salary through the PAYE scheme.  The tax paid varies depending on the level of salary received. 

We are all entitled to tax free earnings of £5,225 before our income is taxed at the appropriate rate of tax, whether basic (22%) or higher rate (40%).  At the end of each tax year this should mean we have paid the correct amount of tax.

However, what many doctors may be unaware of is that all other sources of income, out-with employed earnings, must be declared each year and appropriate tax paid on them.  This could include one off sources of income such as Cremation fees, Medical reports, Locum work etc. 

H M Revenue and Customs (formerly the Inland Revenue) expect each earning individual to notify them of any additional income sources in a tax year by completing a tax return form.  The tax years run from 6 April to 5 April each year and the tax returns must be submitted by the following 31 January.  There may be penalties for late or non-submission.  For the majority of employed doctors this is a relatively simple and straight forward task and if need be the advice and assistance of a tax adviser can be sought.

Self Employed Doctors

If the additional income sources received each year are more regular then it may be necessary to register with the Inland Revenue for self employed status.  It is possible to be both employed and self employed.  GPs for example will be mainly self employed and the majority will earn their income from profits paid from a partnership.

When considering self employed status the first thing you must do is to notify H M Revenue and Customs that you are self employed.

If you do not do so within three months of starting your self employed activities, an automatic £100 penalty will be issued.

As an employee, Class 1 National Insurance is deducted from your salary through the PAYE scheme, but as a self employed person, you may be liable to pay Class 2 and Class 4 National Insurance also, although if your income from self employment is below certain levels, you might qualify for what is known as the Small Earnings Exception.  For the tax year 2007/2008, the limits are £4,635 for Class 2 and £5,225 for Class 4.

If you are liable to pay Class 2 contributions, these can be paid monthly or quarterly by direct debit.  Class 4 contributions, if due, are paid with the tax due on your self employed income and are due on 31 January following the tax year.

If you pay Class 2 and 4 contributions and after the end of the tax year it transpires that you have overpaid national insurance because of the level of Class 1 contributions also being paid, the excess can be reclaimed.

Maintaining Records

The tax legislation requires you to keep records of your self employed income and expenses for six years following the tax year to which they relate.  Ideally you should have a separate business bank account into which your income from this source should be paid and from which you should fund business expenses but you should keep a record of the income and expenses over and above the bank statements.

Expenses deductible for tax purposes

Expenses incurred wholly, exclusively and necessarily for the purpose of your employment may be set against employment income and thus reduce tax due.  For example, if you pay your own subscriptions or fees to MDDUS, GMC etc then these are allowable deductions.  It may be that some employment expenses are already included in your PAYE code for the tax year.  This would mean that they had already been taken into account before deducting the correct amount of tax from your salary.  However, if expenses in the year differ from those stated on your code it may be that you have either overpaid or even underpaid tax.

The self employment expenses you can claim are those incurred in earning the income.  If you hire a room or other premises, these costs would be deductible, as would costs of stationery if, for example, you are having invoices or information leaflets, etc, produced.  Business related telephone expenses would also be allowable deductions.

If you are based at home and travel to see patients then your travelling expenses would be deductible.  Assuming you travel by car, then you have the option of claiming the actual expenses relating to the business mileage you travel or an HM Revenue and Customs approved rate of 40p per mile for the first 10,000 miles.  In practice, the latter is easier to do from an administrative point of view as it requires you to record only the number of business miles you travel rather than recording the business miles and also calculating the appropriate percentage of the running costs of the car, including insurance, road tax, petrol, repairs and maintenance.

If you practise or work from home then you would be able to claim a small proportion of household costs for the use of a room in your home.  In practice, the level of expenses most people can claim for this is very low as care has to be taken that the claim can be justified and does not jeopardise the Capital Gains Tax exemption for your home.

This is by no means an exhaustive list of expenses but it gives a broad idea of expenses to consider.

Superannuation Schemes and Personal Pension Payments

Contributions made to superannuation schemes are deductible expenses for tax purposes.  For employed doctors this will be taken into account when their salary is paid and as such PAYE payments will be adjusted accordingly.  Self employed doctors "pay" their superannuation contributions through a monthly deduction by the relevant health board with a one off annual adjustment after the end of the year.  Tax relief is claimed through the doctor's personal tax return and set off against "practice profits."

Doctors are also permitted to make payments towards personal pension schemes in respect of non-pensionable earnings.  These payments would again be used in the preparation of the tax return.  Here however, instead of the contributions being deductible from income they are instead used to extend the basic rate band for tax purposes.  This means that an additional tax saving of 18% is gained from the contributions. (A 22% tax savings has already been made at source on these payments because they are paid net of basic rate tax).

Tax Efficient Schemes

There are also a number of tax efficient investments that can be made by doctors, as with other tax paying individuals, to reduce the overall tax due in a year.  An example of these would be investing in an ISA, EIS or VCT scheme.  There are a number of options and these can be explored on your behalf by a tax adviser.

There are certainly a number of tax issues that doctors require to consider and many are not aware of them.  This should give an insight into what is expected if you are either an employed or self employed doctor.  However, further advice should be sought if any specific information is required relating to your individual circumstances.

It is important to get off on the right footing with H M Revenue and Customs and not fall foul of any of their regulations as this can cause problems and even lead to lengthy enquiries.

 This area is not regulated by the Financial Services Authority.