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Are you struggling to understand the calculation of superannuable profits?

The new GMS contract introduced a major change as to how GPs superannuation will be calculated in the future, moving from being based on a proportion of income to NHS profits.

To calculate your NHS profits you or your accountant will need to complete the new Annual Certificate of Pensionable Profits, which you should have received from your PCT. This will need to be submitted to the PCT by 28th February 2006.

To illustrate how the certificate should be completed, we are using Dr A as an example from a two partner practice. The information needed to complete the certificate can be found in the accounts and also the partnership tax computation, which is used to complete the partnership tax return.

Boxes 1 to 12 are preliminary calculations for the split of expenses. Included in the accounts will be expenses that relate to NHS income and non-NHS income, it is very difficult to determine how much of salaries, heat and light, rent etc relate to non-NHS income. For most GP’s, expenses will be split based on the ratio of non-NHS income to total income (standard method).

The entries in the boxes should be the amounts adjusted for tax purposes. As you are probably aware the profits per the accounts are never the same as the profits declared on your tax return. The reason for this is there are certain adjustments that are required by tax legislation before arriving at taxable profits. For example, some income may have had tax already deducted at source i.e. bank deposit interest and hospital appointments. If these are not adjusted for, then tax will be paid on this income twice. Your accountant will deduct this income from your profits before arriving at taxable profits. These adjustments will be shown on the tax computation and will not appear in the accounts. Depreciation is not an allowable expense for tax purposes and capital allowances are claimed instead. Again the profits per the accounts are adjusted to add back the depreciation and then deduct the capital allowances Again, these adjustments will be shown on the tax computation. Some legal and professional fees are not allowable for tax purposes and would be added back on the tax computation e.g. solicitors fees for preparing partnership agreements are not an allowable expense.

Box 1 – Should include your share of partnership income, adjusted for tax purposes. This practice’s income is £399,256 (his will be the income from the profit and loss page in your accounts) of which £28 relates to bank interest and is excluded for tax purposes (this will been shown on the tax computation). This gives an amount of income of £399,228. Of this amount, £50,982 of income is not split in the profit sharing ratios, but is allocated to the individual partners first, this is shown in the accounts as a prior allocations. Therefore, the income cannot simply be split in the ratio 50:50. To calculate Dr A’s share of income, we firstly need to deduct the total amount that has been prior allocated of £50,982 from the total income (adjusted for tax) of £399,228 which gives £348,246, his 50% share is £174,123. This is added to the income that has been prior allocated to him of £27,582 to give your share of income of £201,705.

Box 2 – Should include any medical income that is not included in the partnership accounts (box 1). Dr A’s personal income is £715, which has been shown as a deduction from his personal expenses, and is the entry for this box.

Box 3 – If any income in boxes 1 and 2 has had superannuation deducted at source then it should be included in this box e.g. hospital income which has had superannuation deducted. If this income has been taxed then it has already been excluded from box 1.

Box 4 – Is the total of boxes 1,2 and 3.

Box 5 – Should include your share of non-NHS income from the partnership e.g. private fees. The total non-NHS income in the accounts is £14,594, of which Dr A’s share is 50% giving an amount of £7,297.

Box 6 – If any of your non practice income (box 2) is non-NHS then it needs to be entered in this box. The amount of £715 is for private fees, and is included in this box.

Box 7 – Is the total of boxes 5 and 6, which is £8,012.

Box 8 – Is the calculation of your non-NHS income to total income ratio. This is calculated by dividing Dr A’s non-NHS income (box 7) of £8,012 by his total NHS and non-NHS income (box 4) of £202,420 this is 3.96%.

If your non-NHS income to total income ratio is more than 10% and your non-NHS income total figure is above £25,000, then the standard method cannot be used. Instead, the alternative method or your own method should be used to calculate a more accurate split of expenses.

Box 9 – Is your share of partnership expenses adjusted for tax purposes. The expenses per the accounts are £208,393 (this will be the expenses per the profit and loss page in the accounts) this includes an amount of £1,150 for depreciation which is added back for tax purposes. The capital allowances are deducted of £1,548 (these adjustments will be shown on the tax computation). Therefore, expenses adjusted for tax purposes is £208,791. Again, this cannot simply be split in the ratio of 50:50 as an amount of £3,675 has been prior allocated to Dr A. To calculate his share of expenses, we need to deduct the amount that has been prior allocated of £3,675 from the total expenses (adjusted for tax) of £208,791, which gives £205,116, his 50% share of this is £102,558. This is added to the expenses that have been prior allocated to him of £3,675 to give his share of expenses of £106,223.

Box 10 – Is your personal expenses and personal capital allowances that are not included in box 9. Dr A’s net expenses are £6,463, of this an amount of £715 has been deducted from the total expenses, therefore his actual expenses are £7,178 (£6,463+£715) plus his personal capital allowances of £1150 giving a total for this box of £8,328.

Box 11 – If the surgery loan interest is not included in the partnership accounts and shown as an expense in box 9, but is declared separately on your tax return, then the relevant amount needs to be included in this box. The amount included will be the figure per your tax return. In this example, the surgery loan is shown as an expenses in the partnership accounts, therefore this box is not relevant.

Box 12 – Is this total of boxes 9,10 and 11.

The actual calculation of superannuable profits starts from box 13.

Box 13 – Is your taxable profits from the partnership. This will be the amount that is declared on Dr A’s tax return, which is £87,858

Box 14 – Is the amount of employer’s superannuation, which has been deducted under the new contract from 1st April 2004 to your accounting year end. In this example the amount deducted from 1st April 2004 to 31st March 2005 is £9,376.

Box 15 – Is any income that is included in your taxable profits (box 13) that has already been pensioned e.g. hospital income paid gross to the practice. If the income is not included in box 13, then it can be ignored as it has already been pensioned and does not need to be included in this calculation. In this example, this is not relevant.

Box 16 – Is your non-NHS income, which is included in your taxable profits (box 13). For Dr A this is the same amount as box 7, £8,012.

Box 17 – Is your non-NHS expenses. As your ratio of non-NHS income to total income ratio (box 8) is below 10% and your non-NHS income is below £25,000 you can use the standard method. The standard method calculates your non-NHS expenses based on the non-NHS to income ratio (box 8). For Dr A his non-NHS income ratio is the 3.96% (as calculated in box 8) multiplied by total expenses of £114,561 (box 12) which gives £4,535.

Box 18 – If the surgery loan interest in declared on your tax return, the amount should be entered in this box as it is part of your expenses. In this example, this is not relevant.

Box 19 – Is there to sweep up any NHS income, which should be superannuated under the new regulations, but is not included in the taxable profits (box 13), for example if a GP has income from out of hours co-op work and this is shown separately on their self employment pages of their tax return. This income will not be included in their taxable profits (box 13), and as it is now superannuable this income should be entered in this box.
Box 20 – Is your total superannuable profits before adjusting for the employer’s superannuation. For Dr A this is £93,756.

Under the new contract the global sum includes the funding to pay for the GP’s employer’s superannuation contributions, which were previously paid, direct by the PCT. The PCTs are making deductions for the employer’s contributions based on an estimate, as the actual amount will not be known until the certificate has been completed. The deductions made during the accounting period are effectively payments on account, and it will be necessary to calculate a balancing payment in respect of the employer’s contributions as well as employee’s. In order to ensure that GPs are not paying superannuation contributions on the income they received to fund the employer’s contribution we need to calculate the superannuable profits before employer’s contributions. We will never know the exact amount of funding being given but we do know the amount that is being deducted by the PCT. Therefore we need to add the actual amount of employer’s contribution that has been deducted during the accounting period, back to the profits (this is shown in box 14). Box 20 represents the GP’s profits plus the funding for the employer’s contributions. It is assumed that this amounts to superannuable profits plus the 14% for employer’s superannuation. So to return back down to superannuable profits we need to multiply the profits in box 20 by 100/114. This is the profits on which the GP will pay their 6% and 14%.

In this example Dr A’s superannuable profits including the employer’s superannuation is £93,756, which is multiplied by 100/114 to give superannuable profits of £82,242. The employees (6%) and employers (14%) contributions will be calculated based in this amount.

The certificate should be submitted to the PCT who will then compare the actual superannuation due to the deductions made, and any balance due will either be deducted from your next payment or collected direct from the practice.