GP contributions to NHS pension scheme

Tax treatment of 14% employer contributions paid in respect of practice GPs in tax years 2004-05 and 2005-06

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Background

The National Health Service Pension Scheme (NHSPS) is an occupational pension scheme established for NHS employees. For tax purposes, it is a relevant statutory scheme under section 611A(1)(a) Income and Corporation Taxes Act 1988. The availability of tax relief for contributions paid to the scheme was, until 6 April 2006, given under s.594 Income and Corporation Taxes Act 1988.

Under that section, relief was only available in respect of contributions paid by "any officer or employee under a relevant statutory scheme". GPs are self-employed for tax purposes and therefore are not eligible for tax relief under section 594. But, since 1948, GPs have been allowed relief by concession (currently under ESCA9). The concession gives relief by treating s.594 as extending to assessments under Schedule D on the profits of a medical or dental practitioner who is required to make superannuation contributions under the rules of the NHSPS.

Until 1 April 2004, GPs were only required to pay the 6% contribution that NHS employees were required to pay to NHSPS under the scheme's rules. The GP's host PCT and the Department of Health jointly paid the employer contribution of 14%.

This changed after the introduction of new contracts for GPs in England & Wales. These new contracts took effect from 1 April 2006. Revenue Policy Business Tax
take the view that, following the introduction of the new contracts and consequent amendments made to Schedule 2 (which sets out additional rules for those scheme members who are medical and dental practitioners) of The National Health Service Pension Scheme Regulations 1995, the liability for paying the 14% employer contribution transferred from the PCT (Local Health Board in Wales) and Department of Health to GP practices with effect from 1 April 2004; albeit estimated contributions are deducted by the PCT upfront from the global sum paid to a practice. This has the tax consequences set out below.

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Tax Consequences – SA Returns by GPs

For tax years 2004-05 onwards, practice accounts and GPs' individual SA returns should be completed on the basis of HMRC's view of the correct accounting and tax treatment of GP contributions which is as follows:

1. Following the introduction of the new GP contract, since 1 April 2004 the income of the GP practice has been increased to reflect the fact that GPs are now responsible for the 14% "employers contributions" to the NHS pension fund.

2. This increase forms part of the practice income to be included in arriving at the profits of the GP/Partnership.

3. The pension contributions in respect of the partners (or of a sole GP) are not allowable as deductions in arriving at the taxable profits.

4. GPs should claim relief through their Self Assessment return in respect of the 14% "employer contribution" as well as the 6% "employee contribution".

5. Under Extra Statutory Concession A9 (ESCA9), relief is to be given in accordance with s.594 ICTA 1988.

6. In exercise of its discretion under s.594(2), HMRC (Audit and Pension Scheme Services) has prescribe a higher percentage rate of relief than 15%. The prescribed rate of relief is sufficient to ensure that GPs get tax relief in full on the 14% and 6% contributions and on up to a further 9% of their NHSPS pensionable earnings in respect of added years contributions paid to the NHSPS and/or contributions paid to the NHS AVC Scheme and/or a FSAVC Scheme.

7. In view of the logistical difficulties involved in issuing individual "represcription letters" to over 30,000 GPs and ensuring that we reach every GP, APSS issued a generic "represcription letter" on 6 April 2006. This letter applies to all GPs in England & Wales. The wording of the letter is set out in the Annex to this note. The original has been retained by APSS

8. Under s.594 ICTA, tax relief can only be claimed in the tax year in which the contribution is paid even if it relates to pensionable earnings of an earlier year. Under the procedure put in place by the Department of Health, a PCT initially deducts an estimated amount of contributions from the global sum paid to practices during the financial year. The PCT subsequently calculates the actual contributions due on the basis of a certificate completed by the GP after they have submitted their tax return. The GP then either receives a refund if contributions are excessive (see below) or has to pay shortfall contributions. The time lag involved means that a GP paying a shortfall of contributions for 2004-05 will not be paid until at least tax year 2005-06 and possibly even 2006-07.

9. Our aim is to ensure that all GP NHSPS contributions (plus AVCs) for 2004-05 and 2005-06 that would have received relief had the old GP contracts continued will continue to get relief, but only in the year of actual payment. Accordingly, the "represcription letter" has been worded so that, if a GP's final pensionable profits for 2004-05 show a shortfall in contributions and that shortfall is made good in 2005-06, the represcription rate for 2005-06 will cover the 2004-05 shortfall contributions paid in 2005-06 (i.e. up to 20-29% of 2004-05 earnings when aggregated with contributions for 2004-05 paid in that year) in addition to the 20-29% of 2005-06 earnings for contributions paid relating to that year. This process means there is no need to submit amended 2004-05 returns where a shortfall has occurred and a further 2004-05 contribution is paid in 2005-06.

10. Part 4 of Finance Act 2004 introduced a new simplified tax regime for pension schemes with effect from 6 April 2006. S.594 has therefore been repealed with effect from 6 April 2006. For shortfall contributions paid in 2006-07 and subsequent tax years, the new contribution relief limit of 100% of UK relevant earnings set out in s.190 Finance Act 2004 is expected to be sufficient to cover any shortfall payments of contributions for earlier years made in the year as well as contributions paid for the year itself.

11. There will be instances where a GP's final contribution calculation reveals that the estimated contribution deducted was excessive. The excess contributions are refundable to the GP. Where the GP has already claimed and been given relief on the estimated contributions he/she will have received more tax relief than they are entitled to. In such cases the GP should submit an amended return claiming the correct amount of relief.

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Related issues

GPs who have claimed relief under ESCA 9 for Personal Pension (PP) Scheme contributions in 2004-05 and/or 2005-06

Please note that you may receive amended returns for 200405 and 2005-06 for the reason set out below.

Some GPs have paid PP contributions in respect of NHSPS earnings in 2004-05 and 2005-06 using ESCA9 to waive relief on their NHSPS contributions and claim it instead on their PP contributions. If they do so, the relief waived is of course 20% (or up to 29% if the GP is paying added years contributions, NHS AVCs or FSAVCs). GPs have often paid the PP contributions on the assumption that the NHSPS relief to be waived would only be 6% (as was the case before 1 April 2004).

In such cases, there is nothing in ESCA9 to say that an election to waive relief on NHSPS contributions is irrevocable. So, if their income tax liability has not been finalised yet, a GP may revoke their election for 2004-05 and claim relief on what is now the 20% (6% employee and 14% employer) contribution to NHSPS. HMRC has no objection to the PP contributions being refunded in such cases. This will require an amended return.

On a separate but related matter, the position regarding the operation of ESCA9 in respect of NHSPS and PP contributions for 2004-05 and 2005-06 is unchanged, despite the change in liability for the 14% contribution.

ESCA9 has been withdrawn from 6 April 2006 since the concessional relief it provided is no longer required. From that date, a person may make whatever contributions they wish to one or more registered pension schemes. The only HMRC constraint is that contributions in a tax year which exceed the person's relevant UK earnings for that year will not be eligible for tax relief.

Like everyone else, from 6 April 2006, a GP will be eligible for tax relief on their contributions to one or more registered pension schemes up to 100% of their UK relevant earnings for the relevant tax year. A GP will therefore from 2006-07 be eligible for tax relief on contributions in respect of their NHS earnings paid to both the NHSPS and a PP scheme which is a registered pension scheme under the new regime.

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Retired GPs

A GPs may have retired before shortfall contributions (see above) have been calculated and paid.

The normal tax rules will apply. If before 6 April 2006, the GP is only entitled to relief in respect of contributions not exceeding the represcribed percentage of NHSPS pensionable earnings as a GP for the year in which the contribution was paid. So if a GP retired in 2004-05 and paid shortfall contributions in 200506 they will have no earnings to which s.594 can apply. So no relief is due for the contributions.

From 6 April 2006, relief will only be due if the retired GP has relevant UK earnings (as defined by s.189(2) Finance Act 2004) eligible for relief under s.188 Finance Act 2004.

At present, NHSPS does not operate relief at source (RAS) But, if NHSPS were to decide to operate RAS in respect of GPs in their year of retirement and subsequent years, shortfall contributions of up to £3600 could be given relief even if the GP has no relevant UK earnings chargeable to income tax in the year of payment (section 190(2)(b) and (4) Finance Act 2004).

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Non-GP providers

As explained below, non-GP providers are not entitled to tax relief on their contributions to NHSPS in tax years 2004-05 and 2005-06.

Non-GP providers are partners in a GP practice who are not themselves GPs – the most common example being a practice manager. They are self-employed for tax purposes. Many were previously employees of the practice and as such have been eligible for NHSPS scheme membership since 1997 when GP practice staff (i.e. employees of the practice) were first given eligibility for NHSPS membership.

As partners they ceased to be practice staff and were therefore no longer eligible for NHSPS membership. In March 2005, the NHSPS rules were amended to permit non-GP provider partners to join NHSPS, backdated to 1 April 2005. This was achieved by treating non-GP providers as if they were a whole-time officers employed by the relevant Primary Care Trust or Local Health Board.

However, this does not affect the tax status of these individuals – they are self-employed. There is no provision in ICTA which gives tax relief in respect of contributions made by a self-employed person to an occupational pension scheme of which they are a member (only NHSPS has rules allowing this). They are not "employees or officers" so relief is not available under s.594 ICTA. Although under the rules of the NHSPS non-GP providers are treated as whole-time officers they are not employees or officers for tax purposes. And as they are not "medical practitioners" ESCA9 does not apply to them. The House of Lords decision early last this year in CIR v Wilkinson prevents HMRC from making a new concession or extending the existing ESCA9 concession to provide relief.

From 6 April 2006, the simplified tax regime for registered pension schemes applies. From that date:

a. there is no HMRC objection to a self-employed person being given membership of a registered pension scheme that is an occupational pension scheme, and

b. all members of registered pension schemes are eligible for tax relief on their contributions to a registered pension scheme in accordance with the provisions of sections 188-195 Finance Act 2004.

So non-GP providers will be eligible for contributions paid to NHSPS from 6 April 2006 onwards.

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GP Practice Staff

The above advice does not apply to GP practice staff.

As employees and members of NHSPS they have been eligible for relief until 5 April 2006 under s.594 in respect of the 6% employee contribution they pay to NHSPS.

And the 14% employer contributions paid to NHSPS by a practice in respect of their employees (e.g. practice staff such as nurses and receptionists and salaried GPs who are employees) should, for the purposes of claims to tax relief, be treated the same as any claim for relief under the normal rules of what were Case I or II of Schedule D as a deduction on the "wholly and exclusively" grounds (as s.594 ICTA does not provide relief for employer contributions – unlike s.592).

From 6 April 2006, tax relief for employer contributions to a registered pension scheme is given in accordance with sections 196-201 Finance Act 2004.

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Annex

Wording of represcription letter issued by APSS on 6 April 2006.

Prescription of a higher percentage of remuneration allowable as a deduction under section 594(2) and (3) ICTA 1988

Following the introduction of new NHS contracts for GPs on 1 April 2004, GPs are now liable to pay not only a 6% "employee" contribution but also a 14% "employer contribution". Under Extra Statutory Concession A9, GPs are given tax relief on their NHS contributions under section 594 Income and Corporation Taxes Act 1988. As a result of the new contracts, the percentage of contributions payable by GPs exceeds the tax-relievable contribution limit of 15% of remuneration laid down by section 592(4) Income and Corporation Taxes Act 1988.

It has been decided that GPs should receive tax relief on the 14% contribution as well as the contributions already relievable under ESC A9

Accordingly, under Section 594(2) and (3) Income and Corporation Taxes Act 1988 I hereby prescribe that, for the tax years 2004-05 and 2005-06, the amount to be deducted under Section 594(1) of that Act in respect of pension scheme contributions paid by a self-employed general practitioner in a year of assessment shall be an amount equal to the aggregate contributions that the practitioner pays to the following retirement benefits schemes:

  • The National Health Service Pension Scheme (SF49/685) – including regulation D1 and D2 contributions paid by virtue of paragraph 10 of Schedule 2 to the NHS Pension Regulations 1995 (as amended) and contributions paid to purchase added years of pensionable service
  • The National Health Service AVC Scheme (SF49/492)
  • A Free-Standing AVC Scheme (but only in respect of NHS earnings)

provided that the aggregate of a general practitioner's regulation D1 (6% "employee" ) contributions to the NHS Pension Scheme, added years contributions, AVC contributions and FSAVC contributions may not exceed 15% of their pensionable NHS earnings for the year in question.

Where contributions paid as above are due in respect of a GP for the year 2004-05 but are not paid until the year 2005-06, the amount to be deducted shall include:

i. an amount equal to contributions calculated as above due for the year 2005-06, and

ii. such an amount as is equal to the amount of contributions due for the year 2004-05 but paid in the year 2005-06 which, when aggregated with the contributions actually paid in the year 2004-05, would have qualified for relief as calculated above had they been paid in the year 2004-05.

(Signed) ........................................................

On behalf of the Board of HM Revenue and Customs


(Date) .........................................................