Q. I am one of eight partners in a professional partnership. We took the decision to convert to limited liability status a few years ago. However, I understand from one of my partners that HMRC is tightening the partnership taxation rules and, as a consequence, we are unlikely to continue to be regarded as being self-employed. Is this correct and, if so, are there any steps we can take that would ensure that HMRC continue to consider us to be self-employed?
A. Other than the introduction of limited liability partnerships (LLPs) in 2000, there have been very few changes to the partnership taxation regime for many years. However, in 2013, HMRC announced that it was concerned that partnership and LLP structures were being used inappropriately and in an attempt to avoid taxation.
As such, HMRC issued a consultation proposing to change the rules governing the taxation of partnerships. The consultation focussed upon two areas of concern – the manipulation of profit and loss accounts in order to reduce tax and the granting of LLP membership status (i.e. self-employment) to disguise employment relationships.
Draft legislation has been published – which will come into effect from 6 April 2014 – that goes significantly further than many commentators had expected. As a consequence, some members of an LLP will continue to be regarded as being self-employed under both tax and employment law, whereas others (somewhat confusingly) will be deemed to be employees for the purposes of the relevant tax legislation but not for the purposes of appropriate employment legislation.
Essentially, there will be three tests relevant to determining whether or not members of a partnership or LLP are self-employed for the purposes of both tax and employment legislation.
1. Is less than 80% of a partner’s drawings fixed, irrespective of the firm’s financial performance?
2. Does the partner in question have significant influence over the management of the partnership or LLP?
3. Has the partner contributed capital to the partnership equivalent to more than 25% of their fixed drawings?
If a partner can answer “yes” to any one of these three questions, they will continue to be treated as being self-employed for the purposes of both tax and employment law. However, if that person answers “no” to all three questions, they will be regarded, by HMRC, to be an employee of the partnership or LLP.
If you have any concerns regarding your self-employed status (or that of your fellow partners), I recommend that you seek advice from a suitably qualified accountant as a matter of urgency. In the event that you are likely to fall foul of the new regime, there may be steps that you can take to restructure your partnership and mitigate the potentially onerous tax consequences.
Q. I am a doctor and a member of the NHS Pension Scheme. I am aware, having read your answers to a couple of recent questions, that the maximum amount I can save into my pension in any given year (the “Annual Allowance”) is about to reduce to £40,000. I do not make pension contributions of anything like this amount and I had assumed therefore that the reduction to the Annual Allowance would not affect me. However, a colleague has suggested that it is incorrect to focus upon the monetary value of my contributions when considering whether I have exceeded the Annual Allowance. Are they correct and, if so, can you offer any assistance please?
A. First, you are correct that the Annual Allowance – the maximum amount a person can save into a registered pension scheme in any given year – is set to reduce, from £50,000 to £40,000, with effect from 6 April. It is worth noting however that this was considerably higher – £255,000 – as recently as the 2010/11 tax year.
Secondly, your colleague is correct that you should not consider the monetary value of your pension contributions when assessing whether you may exceed the Annual Allowance. Whilst this would be appropriate if you were a member of a defined contribution (often referred to as “money purchase”) pension scheme, this is not the approach that ought to be adopted by members of a defined benefit pension scheme (the NHS Pension Scheme, of which you are a member, being such a scheme).
Members of defined benefit pension schemes (such as “final salary” and “career average” schemes) must assess the value of their benefit accrual in a given year (rather than the monetary value of their contributions). This is done by comparing the value of their pension benefits in the previous year (adjusted for inflation) to the value of their pension benefits in the year in question. The increase in the value of the pension benefits from one year to the next is then multiplied by a factor of 16. It is this number that must be assessed against the Annual Allowance.
For example, if (having taken account of inflation) the value of your pension payable upon your retirement increased in value by £3,000 from one year to the next (i.e. from £20,000 to £23,000), the value of that accrual would be £48,000. Whilst this would not give rise to an Annual Allowance issue in the current tax year, if this calculation were in respect of the 2014/15 tax year it would mean that you had exceeded the Annual Allowance by £8,000.
In the event that the amount of your pension savings exceed the Annual Allowance, the excess amount is added to all other taxable income for the relevant tax year and is, therefore, taxed at your marginal rate.
If you anticipate that you may be affected by the forthcoming reduction to the Annual Allowance, there are measures that you can take in order to avoid increasing your income tax liability and to maximise your retirement planning opportunities. For example, you may be able to apply “carry forward” allowance, which, essentially, enables you to make use of unused allowances from up to three previous years in order to offset a prospective Annual Allowance tax liability. Other options that you may wish to consider – depending upon your personal circumstances – include cancelling added years contracts and 24 hour retirement.
However, such decisions should no be taken without being informed properly of all of your options and the consequences of each one. I recommend therefore that you seek assistance from a chartered financial planner, who specialises in retirement planning and who is familiar with the peculiarities of the NHS Pension Scheme and the particular issues that affect medical professionals, as a matter of urgency. They will assess your personal circumstances, advise you whether you are likely to exceed the Annual Allowance and, if so, recommend steps that you can take to mitigate the prospective tax charge and to maximise your retirement benefits.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
