Does taking on a non-clinical partner impact on seniority and pensions?

Under the new GMS contract practices can included in their partnership partners who are non-clinical NHS staff as long as the practice has a least one GP.

One of our clients who is a single-handed GP wanted to know the implications of making his wife, who was also the practice manager, a partner and sharing the profits equally.

Our client had suggested the idea as he thought it would be a good opportunity to share his profits and reduce the overall tax burden that he and his wife had.  

His accounts for the year ended 5th April 2004 showed profits of £110,000 and he anticipated these would increase under the new contract due to the income from the quality and outcomes framework.

The tax and class 4 national insurance contributions on our clients profits of £110,000 is £39,325.  He employs his wife as the practice manager and pays her a salary of £25,000 on which he incurs employers’ national insurance contributions of £2,609. She pays an amount of tax and class 1 national insurance on her salary of £6,491.  In total the couple pay tax and national insurance of £48,425.  If they become a partnership the wife’s salary and employers’ national insurance would no longer be a cost and so the revised profits would be £137,609.  If these profits were split equally this would give them each a share of £68,805 and the total tax they would pay on their share of profits would be £22,433 each, saving £3,559 overall.

Although there are tax savings to be made, we pointed out to our client that there are some implications under the new contract which he needs to consider before deciding how they will share the profits.

Seniority
Under the new contract seniority is calculated on the number of years’ reckonable service in the NHS plus it is now linked to superannuable profits.  Our client has 30 years reckonable service and is receiving seniority of £8,675p.a. If he decided to share the profits equally with his wife and his profits were below two thirds of the average then his seniority would be restricted.

Under the new contract if a GP’s share of profits is between one third and two thirds of the average then the GP would only receive 60% of their seniority entitlement.  If below one third of the average then would receive no seniority.

If our client’s profits were between one third and two thirds of the average he would lose an amount of £3,470 of income and if below one third he would lose £8,675 of income.

We suggested that if our client’s wife became a partner that they consider sharing profits other than equally. This is to ensure that our client does not lose any seniority income.  The only problem is that the average superannuable profits will not be known until all GP’s have submitted their forms detailing their individual superannuable profits.

Pensions
Under the new contract superannuation is now going to be calculated based on a GP’s share of NHS profits.  Although the guidance on how this will be calculated has still not been issued, it will not simply be the profits per the accounts as this includes non-NHS income and non-NHS expenses.  

Our client’s profits are £110,000, although this would be adjusted for non NHS income and non NHS expenses, this is an estimate of the level of profits that he could pay superannuation on.  If our client decided to share profits equally with his wife then this would substantially reduce the amount of NHS profits to about £68,805.   When deciding on how to share profits our client would need to ensure that his share should at least give him the same superannuable income as in the previous year so that this does not affect his pension.

If our client’s wife does become a partner they would need to decide how to share profits in the most advantageous way so as not affect seniority income and his superannuable profits.  Certainly in the first year it may be preferable that his wife takes a reduced share of profits until it has been established what the average superannuable profits are for seniority and what his profits would be for superannuation purposes.