All figures mentioned below are correct for the tax year 2020/2021.
Pension Considerations With Private Practice
The NHS pension scheme is very generous and will rightly form the majority of a consultant’s retirement planning. There are two taxes which affect pension planning:
1.) The Lifetime Allowance
2.) The Annual Allowance
The NHS Pension scheme is a defined benefit pension meaning that there is no investment risk, it is a promise to pay you an income from a set age, index linked, until the day you die. There are currently 3 versions of the NHS pension scheme 1995, 2008 & 2015 - we will not go into detail here as it is beyond the scope of this article.
The lifetime allowance is the total value of tax privileged pensions that any individual can build up during their lifetime. A consultant who works full time for the majority of their career is likely to exceed this with their NHS pension alone. This is NOT a reason to opt out of the NHS pension scheme in isolation. In many cases the value being provided even after lifetime allowance tax is payable makes it beneficial to continue to fund the NHS pension scheme. It is important that specialist advice is sought in the area prior to taking any decisions.
The annual allowance is the amount of money which has been “deemed to be paid” into your pension during the tax year. Note the wording “deemed to be paid” as it does not relate to the actual contributions which either you or your NHS employer have actually paid. Instead a value is ascribed to the growth in your pension income during the 12 months and the NHS pension scheme produces “Annual Allowance Statements” either on request or around October each year if your input is more than £40,000.
It is important to understand if & when you will be affected by both the lifetime allowance & the annual allowance. These two taxes and the generosity of the NHS pension scheme mean that you need to be very careful when looking to make private pension contributions for yourself. For many consultants they will need to rule out this option as one or both taxes could result in unnecessary payments to HMRC which exceed the value of the tax relief that is provided initially.
Tapered Annual Pensions Allowance
The annual allowance is “Tapered” (reduced) for higher earners potentially affecting anyone earning over the “threshold income” which is £200,000 in 2020/21.
When considering the structure of your private practice you will need to consider your other income which is likely paid to you by the NHS. If you set up as a sole trader or a partnership then the private practice profits will be paid to you each tax year. This can be a problem if your total income exceeds the threshold income and your annual allowance is potentially tapered.
A limited company structure will pay corporation tax on the profits each year (currently at 19%) but you can then decide if & when to take a dividend & if so how much to take. This gives you the flexibility to pay a higher dividend some years or even to take no dividend at all & to allow the retained profits to accumulate.
Financial Planning Opportunities With Private Practice
If you don’t have a need to draw on the profits of your private practice then it is possible that your accountant will recommend a limited company structure. This way corporation tax is paid on the profits at 19%.
Your limited company could choose to engage the services of your spouse as a medical secretary. Your spouse can receive a fair salary for this work from the limited company - you need to ensure that this is reasonable and in line with the market rate for the work provided. Your spouse will pay tax & employee national insurance on this income at their marginal rate, the company will also pay employers national insurance.
An alternative is that your spouse could choose not to receive a salary but to instead have an equivalent employer pension contribution made on their behalf. Both a salary and a pension contribution would be a cost to the limited company thereby saving you corporation tax of 19%. By making a pension contribution you are also saving the income tax & national insurance that your spouse may have paid if they received a salary, plus there is no employer’s national insurance on the pension contribution.
This needs to be considered carefully however, because if your spouse has no other income then they will have no qualifying earnings for the state pension. Again you should seek advice before embarking on this route.
Once the money is within the pension environment it can be invested and any of the growth on those investments is free of both income tax & capital gains tax. Private pensions can currently be accessed after age 55 and when accessed 25% of the value can be paid as a tax free lump sum and your spouse will pay income tax on the remaining 75% and can choose to draw as little or as much income as they choose each year.
Adequate Financial Protection?
Every consultant should already have ensured they have adequate financial protection in place should they suffer from ill health. When setting up a private practice is a good time to review this.
Income Protection - Is designed to pay an income should you be unable to carry out your specific occupation due to an illness or injury. Payments are set to usually begin after your NHS sick pay finishes & continue until retirement age if needed. You can usually cover a maximum of 55% of earnings each year, bear this in mind if you decide to use a limited company structure & choose to not draw a salary or dividends from it, you may find that you cannot cover this income and may only protect your NHS income.
Life Insurance & Critical Illness Cover - Often these come as part of the same policy but not always. Life cover pays out if you die & critical illness pays out if you are diagnosed with a number of specific illnesses to the required definition as written by the Association of British Insurers. These policies can be structured as a lump sum or to be paid as an income. You need to ensure that if you either pass away or fall ill that your family are fully taken care of. This means that all of your debts (mortgage or loans) are paid and they are able to maintain their standard of living either upon your death or illness. The need for protection is highest for consultants with young children and mortgages and the need will gradually reduce as those children become financially independent and the mortgages are paid off.
The Importance of Independent Advice
Structuring your finances optimally will help you achieve your long term goals faster and keep more of your hard earned income in your pocket. When seeking a trusted financial adviser to help you it is important that you find one that is independent. This means that the adviser is not restricted when looking at the best options and can genuinely act in your best interests.
Financial Advice touches all parts of a consultant’s life from personal & family matters to their NHS income and also the private practice. Your financial plan needs to take account of all areas for the long term. Your NHS pension is likely to be your largest asset in value terms so ensure that you seek out a specialist with extensive experience in this area.
