Understanding Accounts & Taxation
Book-Keeping - Setting Up Financial Systems
Pensions & Superannuation
Tax Return & Expenses Forms
Personal Expense Claim Form
Locum Expenses Claim form
Rental Income & Expenses Form
Could you have an large tax
bill on retirement?
I am planning to retire from my partnership
on 31st March 2006. Our partnership prepares the accounts to 30th
June each year and I have heard something about overlap profits,
which may mean I will have a large tax bill after I leave. I am
unsure how this will affect me?
If you have an accounting year end which does
not coincide with the tax year, then depending on when you retire
from the partnership this could result in a large tax bill, this
is due to the way profits are taxed in the year you retire.
As your partnership prepares accounts to 30th
June, in the tax year 2005/06 you will be taxed on your share
of profits for the year ended 30th June 2005 and your share of
profits from 1st July 2005 to 31st March 2006 i.e. you will pay
tax on 21 months of profits in 2005/06.
The tax rules state that you can not be taxed
on more than twelve months’ profits in one tax year. To
reduce your profits from 21 months to 12 months you would deduct
your overlap profits, which would be equivalent to 9 months profits.
(see Table A). However, the problem with overlap profits is that
they are likely to be based on profits from earlier years, which
would be much lower than the profits you will earn in 2005/06.
Overlap profits either arose in 1996/97 when
self-assessment was introduced or on joining a partnership. These
are profits that have been taxed twice and therefore are deducted
on leaving a partnership or change of accounting year end.
Your accounts for the year ended 30th June
2005 have already been prepared, so we can estimate your potential
tax liability which would become payable in January 2007 (see
The accounts for the year ended 30th June
2005 show your individual profits of £139,000. It is estimated
that your share of profits from 1st July 2005 to 31st March 2006
will be in the region of £120,000. This gives total profits
for 21 months of £259,000. Your overlap profits are £40,000,
this is equivalent to nine months profits earned in 1996/97.
After your £40,000 deduction of overlap
profits, your taxable profits in 2005/06 will be £219,000
this represents profits for 12 months. However, the problem is
that your nine months profits from 1st July 2005 to 31st March
2006 are estimated to be £120,000 compared to the equivalent
nine months overlap profits of £40,000 which arose in 1996/97,
this means you have tax to pay on the additional £80,000
As a result you would have a potential balance
of tax for 2005/06 of £38,000 due in January 2007.. On this
date you would also be required to make a payment on account for
the next tax year, 2006/07 of £42,000 giving a total tax
payment due by 31st January 2007 of £80,000.
However, if you are only going to be receiving
your pension in 2006/07, your accountant can apply to reduce your
payments on account for 2006/07, as these are based on your earning
self employed income of £219,000.
||Tax year 2005/06
||Equivalent no of months
|Profits – ye 30.06.05
Profits – to 313.03.06
Total tax due on profits
1st Payment on a/c 2005/06
2nd Payment on a/c 2005/06
Balance 2005/06 due January 2007
With the introduction of the new GMS contract, practices are already
seeing large increases in profits, which are expected to continue
in 2005/06. GPs planning to retire whose accounting year end does
not coincide with the tax year, should ensure they seek advice
from their accountant as to their potential tax liabilities. If
GPs are unaware of the rules regarding the final taxation of profits,
a large tax bill may come as a nasty shock, especially if they
are only receiving a pension.
GPs could consider going part time before
they retire so that their final profits on retirement from the
partnership would be reduced and after deduction of overlap profits
may not leave a large amount of profits to be taxed.
A final thought, for GPs considering retiring,
is that it may be advisable to wait until after 31st March 2006,
to gain the maximum pension benefit under the new contract.