It’s not uncommon for doctors in private practice, especially those who are new to running a business, to run into financial problems. Sandison Easson's Partner, Ian Tongue, picks out some key areas to be aware of and shows how to stay out of trouble.
With the busy demands of a consultant carrying out private work, it is easy to encounter financial pitfalls that can result in significant financial pressure or loss.
Let's look at some of the more common areas to focus on to avoid a potentially costly mistake.
Running a business
One of the most common problem areas is not treating your private practice as a business.
It may sound simple, but the career path towards carrying out private work rarely sees you paid outside of the PAYE system.
Therefore, patients and insurers paying you without tax deducted – and robust chasing systems when they don’t pay or part pay – are essential to ensure that you are not working for free.
All private practices are required to maintain adequate accounting records and, as a minimum, this should enable you to understand the financial position of the practice at any time.
Records of work undertaken together with details of when payment was received are the absolute minimum required.
Likewise, expenses need to be meticulously recorded to ensure all your spending is included thereby minimising your tax liability.
Where payment is not received, systems to investigate and chase this money are required to avoid financial loss.
It is surprising how many consultants write off debts because they left things too long and didn’t deal with things at the time.
Pension Complexities
Most consultants will be in the NHS Pension Scheme. There are different schemes that you could be in and there has been a recent legal challenge to the newest (2015) pension scheme, which was implemented illegally and needs to be remedied. This is known as the McCloud remedy and will take a period of time to implement.
Irrespective of which NHS Pension scheme you are a member of, they all have one thing in common: what you get out of the pension pot as a pension is not determined by how much you have put in. The various schemes largely use a combination of earnings and service to determine how much your pension is worth and has grown by annually.
HM Revenue and Customs allows you to have pension savings of £40,000 a year unless your earnings exceed £200,000, in which case you may have a lower allowance which could be as low as £4,000.
Tax charges arise if your pension savings exceed allowable limits and this can be a significant risk area for consultants if you have not had specialist advice.
The McCloud remedy will restate historic figures, so it is important that your accountant and independent financial adviser are on top of this to advise you of your specific circumstances when NHS Pensions inform you of your revised historic pension figures.
Significant financial loss may arise from this process not being managed correctly, so get in touch with your accountant to discuss things further.
Trading structure
When it comes to financial loss, often this can take the form of not being tax-efficient for your circumstances. Trading structure is one of the most important decisions you need to make for your business and can save you thou-sands of pounds every year.
But it is important to note that there is no one-size-fits-all approach to structure, so do not be swayed by other colleagues’ circumstances. Speak with a medical accountant who can assess your circumstances in detail and advise you on the best approach.
Factors such as employment earnings, spouse’s earnings, dis-posable income needs and pension all come into play and can make a big difference.
With the new tax rates for companies coming into force from 1 April 2023, together with increases to income tax on dividends from 6 April 2022, some doctors in private practice may need to reconsider their trading structure.
If fully affected by the 6% corporation tax rise and 1.25% income tax rise on dividend income, it will make a significant difference to your tax position.
Tax saving
The PAYE system generally looks after itself to deduct the right amount of tax, provided that the monthly tax allowances are applied appropriately.
When carrying out private practice, you are inevitably entering the world of self-assessment, which is a fundamentally different way of disclosing and paying your tax and National Insurance.
Self-assessment requires you to submit a tax return annually by the following 31 January of the tax year in question.
For example, the tax return for the year ended 5 April 2022 needs to be submitted by 31 January 2023. As the name suggests, it is self-declaring your earnings and other tax-sensitive transactions and little or no backing documentation is supplied.
HM Revenue and Customs (HMRC) police this system through making inquiries into tax returns it feels may be incorrect. Penalties are applied for incorrect disclosure and therefore it is extremely important to fully dis-close your financial circumstances.
Paying tax on account
When entering into the self-assessment system, you need to understand when tax is due and how the payment on account system works, as this can amplify the tax due, particularly in the early years where your profits are usually rising rapidly.
Not saving enough tax can be extremely stressful and can be avoided by understanding the system from the commencement of trading.
If your private practice began in May 2022, for instance, many doctors would, in my experience, be surprised to find that their taxes may not be payable until 2024 on those earnings.
The system allows a long delay for the first payment of tax but then the liability is significant, so it is important to save from the outset.
For example, if you owed £30,000 for the year ended 5 April 2023 and had not made any previous payments under self-assessment, in January 2024 you would owe £30,000 plus a further £15,000 as a payment on account for the 2023-24 tax year.
A further payment would be required in July 2024 as a second payment on account. Again, it would be £15,000 for this example, which is 50% of the previous year liability.
With rising profits, these payments on account do not keep pace with your liability, resulting in catch-up payments in January. Thereafter you will be making regular payments on these dates.
Getting the right team
Running a successful private practice requires the right team around you. One common problem is taking on too much yourself, whether that be administration or financial.
Whenever your precious time is diverted from earning money in your practice, you are inevitably losing profit, as those functions can be carried out at less cost by others.
One of the most crucial decisions when carrying out private work is your choice of secretary. Your secretary can make or break your practice. Choose wisely and if you are not happy with their services, make sure you reconsider your options if they are not able to improve.
The finances for a consultant carrying out private work can be complex and their needs develop as they progress through their career and look to retirement.
Having a medical accountant and an independent financial adviser who understand the medical profession are extremely important to ensure you maximise the returns on your hard efforts while you are working and are best positioned for a comfortable retirement.
Medical defence fees
Another essential aspect of running your private is your choice of medical defence provider.
When you carry out private practice work, you will need to project your income and explain the source to your defence body.
You will need to keep it informed about whether this was accurate and provide a projection annually for the following year’s premium.
It is extremely important to be as realistic as you can with regards to these projections, because you could find yourself without cover/ insurance or facing large back premiums which many find they have difficulty paying.
Building a successful private practice involves many moving parts and not just your skills and reputation.
Ensuring that you set aside enough time to consider how your business operates and review things regularly is key to maintaining success and avoiding financial pitfalls.
As always, work closely with a medical accountant who should be a key member of your team.
Written by Ian Tongue for Independent Practitioner Today.
