All the latest news on what the governments recent budget means for doctors.
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So we thought we would give a brief summary of the recent Budget given by Rishi Sunak recently on the 3rdMarch.
Governments require parliament’s approval to spend money, as well as to raise revenue in the form of taxes and the budget is usually one of the centre pieces of the Governments legislative programme. The measures announced become the Finance Act for the year.
It is deemed that a Government has to be able to pass its Budget because if they do not it is seen as a vote of no confidence and the Government will then have to call an election.
It is also important to pass the budget or at least a pared down version because both income tax and corporation tax are temporary measures and have to be reapproved each year. In election years there are often two Finance Acts – one pre election to make sure we lucky taxpayers get to keep on paying income tax and one afterwards with most of the other stuff.
A Chancellor delivering his or her budget is the only person who is allowed to drink alcohol in the chamber of the House of Commons and you wouldn’t really blame Rishi if he had a glass of something strong next to him.
It was an unenviable budget to have to give given that the UK has seen the biggest fall in GDP for over 300 years exceeding those seen even in wartime. The country is set to borrow a peacetime record of £355 billion this year.
The challenge Sunak faced was building a recovery and raise money while at the same time trying to meet the Conservatives’ election promises not to raise the main rates of income tax, VAT and national insurance.
Let’s start with Personal Tax which basically remains what some have called a “frozen landscape.”
As mentioned above, the Chancellor’s room for manoeuvre was limited. Income tax rates have remained exactly the same at 20,40 and 45%.
What he did do to raise revenue was freeze the personal allowance, the tax free amount that the vast majority of us get each year. In the current tax year that we are in – the 2020 to 2021 tax year that ends on the 5th April 2021 the personal allowance is £12,500. There will be a small increase for the next tax year, that is 2021 to 2022, with the personal allowance going up on 6 April 2021 to £12,570. It was thought that the Chancellor would axe this increase but apparently the increase has already been coded into payroll systems so would have required expensive changes if he had done so.
From April 2022 the personal allowance will remain at this level £12,570 until the 2025-2026 tax year.
For those of you who have listened to our tax code blog – and if you haven’t please do check it out after this – you will know that the most common tax code for taxpayers as of 5 April 2021 will be 1257L. Don’t forget that this will only be the case if the taxpayer is not claiming a deduction for their professional expenses and I’m sure that everyone listening has done so. If you haven’t please check out our podcast or blog on claiming back tax on your professional expenses.
As well as the personal allowance, the rate at which people start paying the higher rate of income tax that is 40% will increase to £50,270 and then also be frozen. The threshold at which an individual starts paying the additional higher rate of 45% remains at £150,000 and has not been increased at all.
This will raise revenue by what is called fiscal drag – as people get payrises in the future, more people will start earning over the personal allowance and start paying tax and more people will move into the higher rate tax bracket.
There had been suggestions that tax rates on the self-employed might increase, which would include many GP locums for example, but in the event no announcement was made.
What was announced recently is a 1% pay rise for NHS staff including some doctors. In the podcast we talk about why inflation means this 1% rise is almost certainly another pay cut. We talk about how some doctors pay has fallen by 30% over the last 10 years in real terms.
Moving onto National Insurance, again much of this remains the same. We have a long detailed podcast on National Insurance so I won’t go into it too much.
As the NIC Class 1 upper earnings limit and the Class 4 upper profits limit are aligned with the income tax higher rate threshold, they too increase next year to an annualised level of £50,270 and will be caught up in the freeze.
Hopefully people will recall that Class 1 National Insurance is paid by employees via PAYE and Class 4 National Insurance is charged on the profits of self employed individuals.
The lifetime allowance is unchanged at £1,073,100 and will remain at this level until 5 April 2026. As people should know where pension funds have been built up and the capital value exceeds this lifetime allowance, a tax charge will be levied on the excess called a “lifetime allowance charge”. This has proven to be quite controversial – by freezing the life time allowance this does make it more likely that people will exceed the allowance and face a tax charge. The BMA have been particularly vocal regarding this calling it an “unfair tax on doctors” and reporting that 72% of 8,000 respondents agreed that freezing the Lifetime Allowance would make them more likely to consider retiring early.
It is argued that the NHS pension scheme is not flexible enough to allow doctors to vary and manage their contributions making it harder to keep working without facing a potentially large pension tax bill as a result.
For completeness I should say that the annual allowance limit is unchanged at £40,000.
On the podcast we discuss in more detail how taxation policy affects behaviour. Sooner or later the high rate of tax at the margins will alter doctors behaviour and this will be a disaster for the NHS.
How much money will you take home for doing a locum shift or waiting list initiative? Probably a lot less than you think because you will be paying tax at your marginal rate. Read more about marginal rates of tax here
The Chancellor also took the opportunity to freeze other allowances including the annual allowance for Capital Gains Tax and the Inheritance Threshold which you are the tax free allowances for those taxes.
Corporation Tax was one of the few taxes that the Chancellor had room to alter and indeed he did.
Currently the UK has a corporation tax rate of 19% on profits for all companies. The Chancellor announced that the rate of Corporation Tax will increase from 1 April 2023 to 25%.
However the existing rate of 19% will continue to apply to small companies, that is those with profits of up to £50,000. A tapered rate will apply to those with profits between £50,000 and £250,000.
We get asked all the time by doctors as to whether or not they should set up and trade using a company and I would strongly encourage those people to listen to our recent podcast on this but of course this change in the corporation tax rate may now make setting up a company less attractive
Finally, just to say a little bit investments.
The ISA annual subscription limit has been held at £20,000. The Junior ISA annual subscription limit and the Child Trust Funds annual subscription limit both remain at £9,000.
We also released a podcast on tax reducers which are government approved schemes that reduce an individual’s tax liability if the individual invests in them. So we talked about the Enterprise Investment Scheme and the Venture Capital Trust Scheme among things. These have not been changed by this budget.
What I really wanted to say about these is that we mentioned the Social Investment Tax Relief scheme which provides tax benefits to those who invest in qualifying social enterprises. This was due to expire on 5 April 2021 as we reported in our podcast but it has been granted a reprieve and has been extended for a further two years to April 2023.
So there we have it, a brief overview of some of the more important parts of the March 2021 budget that will affect doctors and other healthcare professionals.