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How will the recent changes to the tax system affect GPs? I’ve heard that changes to the Annual Investment Allowance are in store. Is this correct? If so, what will it mean for my practice?

How will the recent changes to the tax system affect GPs? I’ve heard that changes to the Annual Investment Allowance are in store. Is this correct? If so, what will it mean for my practice?


Many GPs are likely to be affected by the changes to the tax
rates that have come into effect for the 2010/11 tax year. A
significant number of GPs fall into the bracket of having total
assessable income, after deduction of personal expenses and
superannuation, in the band currently between £100,000 and
£112,950 – where, for every £2 above £100,000, £1 of the tax-free personal allowance is withdrawn. This gives an effective tax rate of 60% for this band of profits before dropping back to the 40% tax rate for assessable profits between £112,950 and £150,000, at which point the tax rate increases to 50%.

A GP on taxable profits of £110,000 will be paying £6,000
more tax than a GP on taxable profits of £100,000 and
hence the effective 60% tax rate in this band. It is therefore
worthwhile looking at possible ways of mitigating this very
high tax rate, either by simply earning a bit less by perhaps
doing less work outside of the practice, or by possibly making
gift-aid payments or additional superannuation payments, so
long as those qualify for tax relief.

The tax relief on pension payments is currently very
complicated, so you would need to get specific advice before
making any additional pension contributions under the
present anti-forestalling rules applicable to 2010/11 and the
new £50,000 pension limit from April 2011.

In addition to the increased rates of income tax, national
insurance (NIC) rates are increasing from April 2011. This will
impact on the practice profits, as there will be an additional
1% employers' NIC on staff salaries, since the employer's
rate increases from 12.8% to 13.8%. In addition, the class
4 NIC, payable by self-employed GPs, will increase by 1%.
Net disposable income is therefore being hit hard by the
cumulative tax changes.

You are quite right that changes are in store relating to
the Annual Investment Allowance (AIA). At present, we have
a very favourable regime for capital allowances for small
businesses as full tax relief is available in the year of purchase
on qualifying capital expenditure up to £100,000. There is just
one £100,000 limit for the GP partnership and the partners'
personal capital allowances; this covers expenditure on
equipment, furniture and fittings and integral fixed assets in
the surgery, but is not available on motor cars.

This AIA is being reduced from £100,000 to £25,000 from
6 April 2012. For practices with a non-31 March year end, the
annual cap is reduced pro-rata for the portion either side of 6
April. Accordingly, if you have a 30 June accounting date, the
maximum capital expenditure qualifying for the AIA in the
year ended 30 June 2012 would be:

9/12 x £100,000            75,000
3/12 x £25,000                6,250

In the three months to 30 June 2012, only £6,250 of capital
expenditure in that period would be covered by the AIA
entitlement, and any excess expenditure would be eligible
for the writing down allowance (WDA). This WDA is also
being reduced from April 2012: to 18% from 20% for general
equipment and furnishings, and for cars with CO2 emissions
of 111 to 160gm/km; and from 10% to 8% for integral fixed
assets and for cars with emissions above 160gm/km.
If you have a 31 March accounting date and spent £40,000
on equipment in March 2012, it would qualify completely for
the AIA, so the whole amount would be offset against tax in
2011/12. If the expenditure was deferred until April 2012
then, assuming the 18% WDA rate continued, the tax relief
would be available as follows:

2012/13                                                      Tax relief

Eqyipment cost      40,000
Less AIA                (25,000)
                             15,000                            25,000

Less WDA @ 18%    (2,700)
                              12,300                             2,700

WDA @18%             (2,214)
                              10,086                              2,214

WDA @18%               (1,815)                         1,815

This method of giving tax relief on the reducing balance
basis on the WDA means that by 2019/20 there will still be a
pool of expenditure of £3,167 being carried forward for relief
in the coming years. So it is worthwhile planning for any large
capital expenditure qualifying for capital allowances relief
to be incurred prior to 6 April 2012 in order to qualify for
immediate tax relief under the present high AIA.

Valerie Martin-Long is a partner in PKF Chartered Accountants
and Business Advisors and is National Director of PKF Healthcare Services. She can be contacted on


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