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How self-employed GP's are taxed

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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.

For Example

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 example: -

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.

November 2005