New tax to cost private doctors £250+ a month

By Robin Stride

Typical independent practitioners will have to pay a projected average of £250 a month each as their contribution to the Government’s new ‘third’ tax being introduced from next April.

Prime Minister Boris Johnson expects the health and social care levy of 1.25% to provide £36bn to bolster health and social care over the next three years. 

The rise in National Insurance and on dividends will mean an additional tax bill of around £3,000 for a consultant with an NHS salary of £115,000 and £100,000 a year from self-employed practice.

James Gransby

Specialist medical accountant James Gransby warned: ‘Those that use limited companies don’t escape the new levy, because it has been added to dividend extraction. 

‘Those that retain profits in their company would not incur the levy as those profits build up, but they would do if they took them out as a dividend at a later date.

‘But if those retained profits were extracted as capital at the end of the company’s life, then this would not trigger the 1.25% levy, as it is only payable on income and dividends.

‘Directors could make a big dividends payment now early. If they wanted to declare a dividend before April next year, then they can get it out before the levy comes into force. They don’t need to draw it from the company; it can sit there as a loan to the director.’

Their levy costs would typically be around the same as for the self-employed doctor in the example above.

For top-earning doctors in private practice, the health and social care levy could cost them up to £1,000 or more extra a month.

Yet another tax

But Mr Gransby, of RSM UK, drew attention to another previously announced tax grab on the way for many independent practitioners in 18-months’ time.  

‘Corporation tax is going up anyway in 2023 for companies from 19% to an effective rate of 26.5% for company profits between £50,000 and £250,000, so that’s a big hit to watch out for too.’

Vanessa Sanders, of Stanbridge Associates accountants, warned: ‘Doctors running a private practice will find they suffer an increase on all fronts: as employees of the NHS, as self-employed, as emp­loyers in their own practices, and on dividends distributed from their limited companies. 

‘This is a significant blow to those businesses recovering from the financial effects of the pandemic. 

‘It is particularly stinging given that their directors were proffered no help themselves, as the Gov­ernment grants were directed towards employees or the self-employed.’

She believed pay rises were likely to be reduced to accommodate the tax hike.

From 1 April 2022, there will be a temporary 1.25% increase in class 1 (employee) and class 4 (self-employed) National Insurance contributions (NIC) paid by workers, in addition to a 1.25% increase in class 1 secondary NIC paid by employers.

The increase will apply to emp­loyed – including those deemed as employees under the IR35 legislation – and self-employed individuals and partners earning above £9,568 in 2021-22. 

Employers will pay the additional 1.25% for employees earning above the class 1 secondary threshold: £8,840 in 2021-22.

From 2023-24, it will be collected through the PAYE system and shown separately on pay slips.

Rate will increase

But already there are fears the 1.25% level will not raise enough and will increase, as has VAT. One consultant, now a healthcare strategy adviser, warned a LaingBuisson webinar: ‘It’s clearly going to go up over time.’

Independent Practitioner Today columnist Julia Burn of Blick Rothen­burg, writing in this issue, advises it will be crucial for doctors to assess how the levy will affect their business before it is implemented. 

She says: ‘By ensuring the financial reporting of your business is regularly updated, you will be able to manage cash flows easier.’

The levy was announced last month as research for our Profits Focus column revealed the alarming early effects of the first two months of the pandemic on the average orthopaedic surgeon’s private income. 

Covid-19 resulted in a fall in income, for the first time, dropping 5.9%. Consultants’ costs fell by 10.3% and their profits were down by 3.7%.