How self-employed GP's are taxed
If you are employed, then your tax affairs
will be straightforward with tax and NIC deducted at source before
you receive your salary.
At some point you may consider being self-employed
e.g. as a locum or joining a partnership or you may already be
self employed and do not really understand how your accountant
calculates your tax.
Under self assessment individuals pay tax
on 31st January and July each year on their self employed income.
On each date a payment on account for the next tax year is paid
which is usually half of the previous years tax liability. Once
your tax return has been prepared you may have a balancing payment
or refund due depending whether your actual tax liability for
the year is more or less than the payments you have already made.
So if your income has gone up since the previous tax year, you
will have a balance due in the following January together with
the first payment on account for the following tax year.
It is worth pointing out that if you were
previously employed then in the first year of self-employment
you may have a large tax bill in the following January. The reason
for this is that as an employee you would not have made any payment
on accounts in advance, so in January you would have all the tax
to pay on your self employed income in that tax year and also
a payment in advance for the next year.
Dr Jones commenced self-employment as a locum
on 1 June 2001, his first tax return to be completed is for the
year ended 5th April 2002. His total tax liability for 2001/02
is £12,396, therefore, his tax payments will be as follows:-
31st January 2003
Balance payment for 2001/02 12,396
1st Payment on account 2002/03 6,198
31st July 2003
2nd Payment on account 2002/03 6,198
The payment in January may come as a shock
as quite often individuals do not realise that they also need
to make a payment in advance of the next tax year.
If you have joined a partnership, as a profit sharing partner
the way your tax is calculated is more complicated especially
if the practice year end is not the same as the tax year end.
The first thing to understand is that although
you will be receiving a monthly drawing this is not the amount
you actually pay tax on. The tax is calculated on your share of
profits which will be shown in the practice accounts, this is
likely to never equal the amount you have drawn as you will be
required to leave working capital in the practice, i.e. an individual
is taxed on the profits of the accounting period ending in the
current tax year e.g. Accounts for y/e 31st March 2002 will be
taxed in 2001/02, accounts for the y/e 30th June 2001 will also
be taxed in 2001/02 as the year end falls into that tax year.
When you first commence self-employment there
are special tax rules for the way your profits will be taxed in
the first three years and these can be explained using the following
Dr Green joined as a partner on the 1st September
2001 at the Medical Centre whose accounting y/e is 30th June.
Dr Green will be assessed in the first three years as follows:
First Year - 2001/02
Profits from date commenced to the next 5th April.
E.g. Dr Green will be taxed on profits from
1st September 2001 to 5th April 2002.
Second Year - 2002/03
First 12 months where there is an accounting period ending in
the tax year, but the period from commencement to the accounting
date is less than 12 months.
12 months to the accounting date where the accounting period ended
in the tax year is at least 12 months after commencement.
Actual basis from 6th April to 5th April where there is no accounting
period ending in the tax year.
In the example for Dr Green the accounting
y/e 30th June 2002 falls into the tax year 2002/03, but this only
includes profits for Dr Green for 10 months, therefore, Dr Green
will be taxed on the first 12 months profits since commencing
i.e. 1st September 2001 to 31st August 2002.
Third Year - 2003/04
12 months to the accounting y/e which falls into the tax year.
E.g. Dr Green will be taxed on profits for
the y/e 30th June 2003.
Self employed individual's pay different class
of National Insurance contributions, Class 2 which is paid by
monthly direct debit and class 4, which is calculated, based on
your profits and this is included in your total tax liability.
Finally you need to register with the Inland
Revenue that you are self employed within three months of commencement
otherwise you can be fined £100.