Technical Employment Status Guidance Tax, National Insurance and Superannuation implications for GPs involved in Clinical Commissioning Group roles
It is important to establish the correct employment status for a worker from the outset. Wrongly identifying a worker as self-employed when in fact they should have been treated as employed can leave the engager facing large tax and NI liabilities. Therefore, the employment status of individuals engaged for CCG posts should be carefully considered to ensure it is correct under current legislation. Indicators that the worker is an employee include: The right of control - the engager can tell the worker when, where and how to do the work Personal service - the worker is expected to complete the task himself The worker is contracted to work a set number of hours or paid a regular wage Under the contract, the worker is entitled to holiday, sick or maternity pay Indicators that the worker is likely to be self-employed include: The worker can decide when, where and how the work is done The worker can hire someone to do the work for them at their expense There is a commercial risk to the worker from the activity The above points are not exhaustive and should be used only as a guide to establishing a worker s employment status. There may be other factors that will indicate whether a worker is employed or selfemployed and therefore each post should be considered on its own merits. In addition, persons who are office-holders are defined as employees in the tax and National Insurance legislation. The Government has recently entered into consultation with regard to the tax status of senior/controlling persons engaged through their own limited company (PSC), which is common in the Public Sector. Essentially the proposals look to shift the PAYE burden from the PSC to the Engager in pursuance of a more transparent system. Any changes are likely to be introduced in April 2013. Professional remuneration paid to office holders and employees is chargeable as employment income. However, in certain situations, such as: The remuneration is not in respect of a directorship and is small in relation to other trading income of the practice The office or employment is in a related field to the practice work When in a partnership, there is agreement between the partners that the fees are included as trading income of the partnership and the partners agree to pay tax on the fees on this basis Special rules may apply, when the remuneration can be treated as ordinary trading receipts for tax purposes. However, the remuneration should still be charged to Class 1 National Insurance through the payroll in the normal way. professional advice sought where it is thought the special rules might apply. As indicated above, because a CCG is a statutory body, any office holder should normally be classed as employed and taxed under PAYE. The status of individuals other than office-holders needs to be considered in light of the badges of trade indicators described above and it is likely that HMRC would regard such individuals as employees on flexible terms because of the substitution and commercial risk factors. It may be possible for some GPs to make the case for the income to be treated as self-employed income in some cases, but this would need to be agreed with HMRC on a case by case basis. It will not be appropriate where the individual is a GP holding a major CCG officer post. What might this mean for a GP taking up a CCG role? Where a GP s role in the CCG is classed as employment rather than self-employment, there are a number of areas which need clarification: 1. TAXATION Where a GP holding a post within a CCG is deemed to be employed, the income earned will be taxed in the same way as early-career Officer posts and Salaried GP posts within General Practice. Some GPs may already hold salaried posts alongside their GP contractor Self-Employed positions - for example, part-time hospital posts, PEC posts or PCT roles. There is nothing to stop a GP holding more than one salaried post at the same time, whilst also being a contractor or Salaried GP in General Practice. Gross earnings from the CCG will be taxed under the normal PAYE regulations and be subject to Income Tax at the rates in force for a particular tax year. A GP s income tax rates will continue to be based on the level of their individual total taxable earnings from all sources. Under current tax legislation, it is expected that most GPs will pay income tax on CCG earnings at their highest rate of tax, which is likely to be at either 40% or 50% (45% from 6/04/2013). The marginal rates on taxable income between 100,000 and 116,000 will not be affected in any way by the status of the income earned from a CCG source. Earnings from employment are taxed under PAYE with tax being deducted at source from the monthly salary after applying the appropriate tax code. A GP s accountant will be able to advise on the correct tax code to be used and, where necessary, will liaise with HMRC to have the correct code issued. Earnings from employment will be included on a GP s Self-Assessment Tax Return, with credit being given for any tax that has been deducted at source under PAYE. In essence, CCG earnings will be taxed at the same income tax rate under current legislation whether they are classed as earnings from employment or self-employment. The rules for determining status should always be followed and 03
2. TAX RELIEF ON EXPENSES INCURRED It is important for GPs to be clear that the treatment for tax of business expenses is different for employees and self-employed individuals and that they cannot apply the rules that they use in respect of their income from self-employment to their earnings as an employee. The legislation allows for tax relief on expenses incurred by an employee if they are incurred WHOLLY, EXCLUSIVELY and NECESSARILY for the purposes of that salaried engagement. Rules for the tax treatment of business expenses incurred by a self-employed individual differ and relief can be claimed where they are incurred WHOLLY and EXCLUSIVELY for the purposes of the self-employed trade. Effectively, this means that for an employed individual, there are limited opportunities for claiming tax relief on expenses. It will not be possible for a GP to claim travelling expenses for the journey between either home or surgery to the CCG place of work; GPs will need to exclude such mileage when keeping a record of their business mileage percentage for tax relief against their self-employed contractor earnings. However, current HMRC rules allow CCGs to offer mileage rates for employees who undertake business journeys as part of their CCG duties; however, this does not include travel to and from the CCG. It is recommended that the HMRC Approved Mileage Allowance rates be used at all times for such claims: the CCG s payroll procedures will deal with this correctly for tax purposes A GP will be properly reimbursed for mileage incurred on behalf of the CCG. In addition and where appropriate, the CCG may provide a mobile phone and/or a laptop computer to GPs to assist them in their CCG work. There is no tax consequence of the provision of the mobile phone. With regard to a provided laptop, so long as it is provided for business use and any private use is of an insignificant nature in relation to the total use HMRC may be persuaded that the benefit is too insignificant to report and provide a dispensation to that effect. An accountant will be able to help a CCG obtain such dispensations from HMRC, where appropriate. Although the opportunities are limited for a GP to claim tax relief on business expenses, it is possible that relief will be available where the GP incurs the costs of undertaking specific CPD training. In essence then, a GP employed by a CCG who remains a GP contractor will continue to claim relief for professional expenses for their contractor role under the self-employment rules which they have been used to applying. However it should be remembered that percentages may change if the balance of work within a GP partnership is changed. A GP s accountant will be able to advise on these areas. 3. NATIONAL INSURANCE CONTRIBUTIONS There is a difference in the calculation of the National Insurance Contributions liability between employed earnings and self-employed earnings: For an employee there will be two tranches of NIC payable on a CCG salary: (i) Class 1 Employer s NIC payable by the employer i.e. the CCG. (ii) Class 1 Employee s NIC - payable by deduction at source from the employee s monthly salary. For 2012/2013 the rates of Class 1 NIC (not contracted out) are as follows: Employee Employer Earnings per week % Earnings per week % Up to 146 NIL Up to 144 NIL 146.01-817 12 Over 144 13.8 Over 817 2 Self-employed earnings are subject to NIC under different rules which GP contractors will be familiar with: Class 2 Class 4 Flat rate 2.65 per week 9% on profits between 7,605 and 42,475 plus 2% on profits over 42,475 There is a mechanism to defer Class 4 NIC where a GP has a salaried post whilst remaining in practice. A GP s accountant will assist with this process where appropriate. This process would normally be used to avoid a significant overpayment of NIC overall. An example may help to illustrate the NIC position: EXAMPLE: DR A EARNING 150,000 - SELF EMPLOYED 2012/2013 Self employed earnings subject to NIC 150,000 Class 4 NIC payable 5,289 Class 2 NIC payable 138 Total NIC payable by GP 5,427 NIC payable by GP practice NIL EXAMPLE: DR B EARNING 150,000 - EMPLOYED INCOME 2012/2013 (not contracted out) Gross salary 150,000 Class 1 NIC EMPLOYEE CONTRIBUTIONS No NIC on first 146 per week 7,592 12% up to 817 per week 34,892 4,187 2% on 818 and over per week 107,516 2,150 Total NIC payable by employee 6,337 EMPLOYER CONTRIBUTIONS No NIC on first 144 per week 7,488 Above 144 per week 142,512 19,667 Total NIC payable by employer 19,667 04
There may be a potential saving to partially offset the increased national insurance burden for a GP. Where the patient facing clinical role of a GP taking up a part time CCG post is likely to change significantly then the locum insurance policy potentially should be reviewed to ensure coverage is appropriate to the changed circumstances. In essence, as seen from the above, the effective NIC contributions are greater under employed status. This is the main reason why HMRC will be keen to ensure that self-employed status is not applied where the circumstances are inappropriate. The burden of this NIC lies with both the CCG, as employer, and the GP, as employee. In the example it can be seen that there is an extra 910 payable by the GP as employee, but the main NIC burden lies with the CCG as employer at 19,667. This additional cost may be offset if reduced locum insurance is required. 4. SUPERANNUATION CCGs will be established as statutory bodies between October 2012 and April 2013 and will start to remunerate or reimburse GPs from April 2013, once they have their own commissioning budget and running costs allowance. In the meantime, either under the current arrangements for emerging CCGs or under the arrangements that will apply from the point of a CCG s establishment up until the end of March 2013, some GPs may receive superannuable earnings through payments made to them by PCTs. This may not be the case, however, where GPs have received payments from companies (e.g. Community Interest Companies or Limited Liability Partnerships) associated with emerging CCGs. From April 2013, all CCG earnings for GPs carrying out work for a CCG will be fully superannuable, providing that the CCG is an NHS employing authority under the terms of the NHS pensions regulations. It will not be possible to choose whether or not this income is to be superannuated on an individual basis. GPs who have applied for Fixed Protection and have ceased making pension contributions will need to be particularly careful to ensure that the terms of the fixed protection rules are adhered to. Their own Independent Financial Adviser should be able to advise in this area. The responsibility for the Employers element of the superannuation will rest with the CCG as the employer. Employee and added years contributions will be paid by the GP as employee. When a GP CCG post is treated as employed service (as described above) it will be lodged in NHS Pension Scheme (NHS PS) records as officer service. On retirement, the better of a separate officer pension for the CCG post, or an adjusted GP pension in which some or all officer service is treated as if it were GP service, will automatically be paid. Where a GP who undertakes an employed CCG post is also a practice partner, the partners will need to consider and agree how the net CCG income will be treated in their practice accounts. Either the net officer income can be retained by the GP undertaking the CCG role and their GP income share adjusted, or the net CCG income can be paid into the practice and both CCG and GP income distributed between the partners according to their agreed practice profits share. NHS PS contributions in these circumstances will be deducted by the CCG only; the CCG income cannot be pensioned again as GP income. GP partnership share agreements and changes to agreements will need to be signed by the partners and lodged with the NHS Commissioning Board (from April 2013), so that it can make appropriate pension deductions. Assuming this to be the case the earnings from CCG posts will affect a GP s final pension in the same way as if they had been earned under self employed earnings status. NHS PS employee pension contributions in these circumstances will be separately tiered, according to the officer rules for the CCG post and according to the GP rules for GP income. The NHS PS GP Certificate, available on the NHS Business Services Authority pensions website, explains how pensionable GP and officer income should be declared and superannuated. The GP s accountant should be familiar with these arrangements. Employer superannuation payments GP contractors have a responsibility to meet these costs, for which funding is included in Global Sum or PMS contract payments. So, for example, each 10,000 of profits that a contractor receives is regarded as a gross payment, inclusive of employers superannuation and, once 14% superannuation has been deducted, the remainder is worth some 8,772. Where a GP contractor is working for a CCG and earning 10,000 of salary, the CCG would need to pay the 14% employer superannuation, rather than the contractor having to pay it from the 10,000 profits. The contractor would, in other words, benefit by some 1,228 for each 10,000 of CCG earnings. If, for instance, a GP earned 50,000 per annum from CCG work (and had their practice profit share reduced by 50k), the difference in employer s superannuation payments would be worth 6,140. This scenario is simplified as a reduction in practice share profits will be marginally affected by the impact of non NHS practice income included within the calculations of the pensionable income of a GP. Employee contributions GP contractors would have to pay employee contributions to the NHS Pensions Scheme on their practice and CCG earnings separately. Contribution rates are tiered and increase gradually with earnings from 4.0% to 10.9%. Because each source of earnings from practice profits and from CCG pay is treated separately, it is possible that a GP contractor may pay a lower amount of pension contributions if their earnings are split between these two sources than if they received all of their earnings from just one of them. The table illustrates the gross pension contributions for various amounts of pay and the effective contribution net of tax relief, which GP contractors would receive for both practice profit income and CCG income. 05
Table showing NHS Pension Contributions both gross and net of tax relief: 2012-13 Pay Gross Net of tax relief 10,000 5.0% 4.0% 15,000 5.0% 4.0% 20,000 5.0% 4.0% 25,000 6.5% 5.2% 30,000 8.0% 6.4% 40,000 8.0% 6.4% 60,000 8.9% 5.3% 80,000 9.9% 5.9% 130,000 10.9% 6.5% As an example, if a GP Contractor were earning 130,000 from practice profits, they would pay an effective rate of 6.5%, after tax relief, or some 8,450. If the same GP were to receive 130,000 split 60:40 between practice profits and CCG earnings, they would pay (after tax relief): 5.9% pension contributions on their practice profits of 78,000, ie. 4,602 6.5% on their CCG earnings of 52,000 (given that the wholetime equivalent rate of pay would be 130,000), i.e. 3,380 Combined pensions contribution of 7,982, around 470 less than if all the income had been received as practice profits Further details, including a ready reckoner on NHS Pension Scheme contributions, are accessible from the NHS Pensions website: http:// www.nhsbsa.nhs.uk/pensions.aspx With regard to tax relief on employee superannuation contributions discussed above the assumption has been made that a GP will not be affected by the Annual Allowance tax charge restricting tax relief on superannuation contributions. It is expected that cases will be fairly rare and if a GP is affected by this tax charge they should take separate advice from their accountant to understand how their tax relief will be affected. In essence a GP working under an employed post for a CCG will continue to have all of these earnings superannuated in the same way that any practice earnings that have been reduced were superannuated historically. In fact the GP may see a reduction in cost to them for the employers element of the superannuation that will now be payable by the CCG and may enjoy employee contributions at a lower tier rate as a result of the way in which their earnings are now split. There will be no adverse effect on pension on retirement assuming total pensionable earnings from both sources remain constant. 5. SENIORITY Under current seniority calculation rules there will be an effect on the amount of seniority that a GP is entitled to when working under an employed rather than a self employed arrangement and this needs to be fully understood. entitled to, based on GP provider service. However, the entitlement to full seniority i.e. 100% of the amount due based on reckonable years worked, is dependent on a GP s pensionable profit level each year as calculated within the Annual Certificate of Pensionable Profit. Employed income is not included in pensionable profit for the purposes of seniority, regardless of whether the salaried income is itself pensionable under the NHS pension scheme. Entitlement to seniority reduces to 60% if a GP s pensionable profit is below a certain level each year. The current estimated pensionable earnings for 2012/2013 eligible for full 100% seniority are 64,431 (2/3 * 96,646), based on the Interim Seniority Factor published by the Health and Social Care Information Centre 1. If a GP s pensionable profit is below this level their seniority entitlement will be reduced to 60%. If a GP s pensionable profit drops to less than 32,215 (1/3 * 96,646) then there will be no entitlement to seniority. Whether or not a GP s seniority pay is affected will depend on the extent of the reduction in their practice earnings and on how far their current earnings are above the 2/3 or 1/3 thresholds. Where very experienced GPs take up CCG officer posts alongside their contractor roles, their current practice earnings may be sufficiently far above the thresholds not to affect their entitlement to seniority. On the other hand, they are likely to have high levels of seniority, so if the reduction in their practice earnings were large enough to put them below either or both thresholds, the potential loss of seniority could be quite significant. Based on current rates of seniority pay, the loss would be: Up to a maximum of 5,560 if they fall below the 2/3 threshold Up to a maximum of 8,340 if they fall from below the 2/3 threshold to below the 1/3 threshold, or Up to a maximum of 13,900 if they fall from 100% entitlement to below the 1/3 threshold (which would require at least a 50% reduction in practice earnings) In the absence of any changes to seniority rules, the CCG could in principle reimburse a GP for any resulting reduction in their seniority pay. The CCG would, however, wish to take into account all relevant factors, including the reduction in the GP s employer superannuation contributions set out above which could partly or wholly offset the impact on seniority pay. In essence, there may be an effect on the amount of seniority payable to a GP who takes up a CCG role. As discussed above this matter can be brought into negotiations with the CCG to ensure no overall adverse effect to that GP. 1 Available at: http://www.ic.nhs.uk/webfiles/publications/007_primary_care/ General_Practice/Technical_Steering_Committee/Methodology_for_2012_13_ISF_ EngWal_GMS_GP.pdf The above commentary is based on current legislation as it is understood today. Rates for Tax, NIC superannuation and seniority are subject to change on an annual basis. The above is designed to give guidance on the current position only. Seniority is based on the number of reckonable years that a GP is 06
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