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:

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:

where:

Therefore *NRE is

(*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:

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

(*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:

where:

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.