GMS Superannuation Plan - Retirement Annuity Relief

Background

Section 12(3) Finance Act 1991 effectively provides that the GMS income of doctors who participate in the General Medical Services Superannution Plan does not come within the definition of “relevant earnings” for the purposes of relief for retirement annuities under Section 235 Income Tax Act 1967. Where such doctors have effected approved retirement annuity policies in respect of private practice income, it is necessary to apportion the overall practice expenses between the non-relevant (GMS) receipts and the relevant (private practice) fees to arrive at the “net relevant earnings” for relief purposes.

Review

Following discussions with the Technical Committee of the Institute of Taxation, the method of calculating the allowable deduction for retirement annuity purposes has been reviewed. This article sets out an alternative method of calculating ‘net relevant earnings’ and retirement annuity relief in respect of private practice income of members of the GMS Superannuation Plan. The alternative method as outlined may be applied for years 1996/97 onwards.

Examples

The following examples will illustrate both the existing method of calculation and the alternative acceptable method of calculating relief, based on the following figures:

		£
GMS Receipts		75,254
[Capitation	49,960
Non-Capitation	25,294]
Private Practice Fees		39,227
Total		114,481
Less: Expenses		42,391
Net profit		72,090
Capital Allowances		2,413
Profit net of		69,677
Capital Allowances

Existing Method of Calculation

Example 1

Under the existing method, the expenses of £42,391 and capital allowances of £2,413 will be effectively apportioned between the relevant earnings of £39,227 and the non-relevant earnings of £75,254.

This is achieved by applying the formula:

A	x B
	C

where:

A	is private practice fees of £39,227
B	is profit net of capital allowances of £69,677
C	is gross receipts of £114,481

Therefore *NRE is

39,227 x	69,677	=23,875
	114,481

(*net relevant earnings)

Retirement Annuity deduction is 23,875 x 15% = £3,581

Alternative Method of Calculation

Before setting out the alternative method of calculation, it might be appropriate to refer to the composition of the GMS income of £75,254 and here it will be seen that this comprises ‘capitation’ income of £49,960 and ‘non-capitation’ income of £25,294. In fact, the GMS Superannuation Plan contributions of 10% by GMS Payments Board and 5% by doctor members are made only in respect of the ‘capitation’ amounts. In this regard, it is acknowledged that the existing method (Example 1) does have a significant impact on the calculation of overall retirement relief in cases where the GMS income includes a relatively high proportion of non-capitation income.

Example 2

Using the same figures as in Example 1, the revised approach would be to firstly set the expenses of £42,391 against the GMS non-capitation income of £25,294 with the balance of £17,097 being apportioned between the GMS capitation income and private practice income as follows:

Expenses	42,391
Less: Non-Capitation	25,294
Net Expenses	17,097
Plus: Capital Allowances	2,413
Adjusted Expenses	19,510
Private Practice Fees are	£39,227

The amount of adjusted expenses attributable to private practice fees is:

39,227 x	19,510	=8,581
	89,187*

(*39,227 + 49,960)

Therefore the amount of private practice income which is available for retirement annuity relief is:30,646 (i.e. 39,227 - 8,581)

Retirement Annuity deduction is £30,646 x 15% = £4,597

It will be seen that Example 2 provides for a retirement annuity deduction of £4,597 as against the amount of £3,581 in Example 1.

Simple Formula

In relation to Example 2, the same result can be arrived at by a simple formula of:

A	x B
	C

where:

A	is adjusted profit after capital allowances
B	is private practice fees
C	is capitation fees plus private practice fees.

69,677 x	39,227	=30,646
	89,187

Therefore *NRE = 30,646

(*net relevant earnings)

Retirement annuity deduction is £30,646 x 15% = £4,597

It is expected that this formula will be used in practice.

It should also be pointed out that the examples have been worked on the basis of a rate of 15%. The rate of 20%, where applicable, should be substituted, in accordance with the provisions of Section 13 Finance Act 1996.