After the hype of reviews into capital gains tax and a wealth tax, the actual budget, when it was announced, was rather dull by comparison. There are some interesting new initiatives – for example, the mortgage guarantee scheme will be of interest for some GPs – but the underlying principle is the collection of additional taxes by stealth.
Income tax, capital gains tax and inheritance exemptions have all been frozen. With annual pay rises and inflation, all three taxes will have a marginal increase in tax yield as income/wealth increases, but the tax allowance remains the same.
The freezing of the pension lifetime allowance is also an issue that GPs will have to consider.
In simple terms, the lifetime allowance is the limit that your pension can grow to before there is a tax charge on the pension. The lifetime allowance is calculated by taking the pension at retirement and multiplying this by 20 and adding to this the lump sum.
So, taking the example of a GP in the 1995 scheme retiring at age 60 with standard benefits, a pension of more than £46,656 would give rise to a charge on their pension pot at retirement.
The lifetime allowance has been frozen in the budget at £1,073,100 until April 2026, rather than it increasing in line with inflation. This means that potentially more doctors could find themselves breaching the lifetime allowance.
While there is some dismay that the allowance was not increased by inflation, it should also not be forgotten that the allowance was £1,800,000 in 2011/12 and GPs retiring today might feel they have been discriminated against their colleagues who retired earlier, by what seem to be an arbitrary setting of the limits.
The personal allowance currently set at £12,500 will increase to £12,570 for 2021/22 and remain there until April 2026.
In addition, the threshold for paying income tax at 40% increases from £37,500 to £37,700 for 2021/22, where it will stay until April 2026. The 45% rate of income tax has not been increased at all and remains fixed at £150,000 until April 2026. So, both high earners and not-so-high earners will suffer an effective increase in income tax in the coming years.
Capital gains tax
There is no increase in the annual exemption from capital gains tax for 2021/22 (unlike income tax) and the allowance remains at £12,300 until April 2026.
We were expecting a challenge to the entrepreneur relief (now called business asset disposal relief) which allows a reduction in the effective rate of tax to just 10%, but this was not addressed in the budget.
Stamp duty and the Mortgage Guarantee Scheme
The exemption from stamp duty on the first £500,000 of property costs has been extended to 30 June 2021, and then continues to exempt the first £250,000 of property costs until the end of September 2021 when it returns to the first £125,000.
The Mortgage Guarantee Scheme will provide lenders with the option to purchase a guarantee on the margin of loans offered above 80% up to 95% of the loan. Lenders will have to suffer 5% of the loss above 80%, and the guarantee will be valid for seven years after the mortgage originated.
The mortgage must be for a residential home and not a buy-to-let, must be for a property in the UK with a purchase value of less than £600,000 and meet the standard requirements to assess the borrower’s ability to pay.
Many locums operate as limited companies (some when they probably should not) and some GPs have set up limited companies for some of their income. To some extent this has been influenced by the low rates of corporation tax.
The budget increase the rate of corporation tax to 25% from 2023, but only for profits in excess of £250,000. If the companies run by the GPs are making £50,000 or less, they will continue to pay corporation tax at 19%. For profits between £50,000 and £250,000 in 2023, a marginal rate of tax will be applied.
The effect on the GP will depend on the amount of profits being made. If the tax on dividends continues as now, a high earning GP with company profits of more than £250,000 and personal taxable income in excess of £150,000 will be paying tax on their corporate dividends at 63.1%, and so this might be the right time to review whether the limited company is the right corporate vehicle for their business.
For those GPs who provide services that are subject to VAT, such as medico-legal work, the VAT registration limit is unchanged at £85,000 and will remain at that level until April 2024.
Investing in equipment
This is likely to be of interest for those GPs who are involved in major developments. The annual investment allowance has increased from £200,000 to £1,000,000 until 31 December 2021. This means that expenditure of up to £1m of plant and machinery (certain capital costs) can be deducted from profits before tax is calculated. This does not apply to cars.
A new super-deduction of 130% of the cost of qualifying plant and machinery will be available for companies until March 2023.
Help for staff working from home
Where a GP practice reimburses a member of staff who has purchased their own home office equipment to enable them to work from home, that reimbursement will not be subject to tax or National Insurance. This was due to end on 5 April 2021, but has been extended until 5 April 2022 as a result of the pandemic.
- Laurence Slavin is a partner at Ramsay Brown LLP Chartered Accountants who specialise in the finances of GPs and their practices. Laurence can be contacted at firstname.lastname@example.org