Five tax tips for locums

Working as a locum has a lot of advantages, but there are some important points regarding tax and your finances that you should be aware of

CREDIT: This is an edited version of an article that originally appeared on Lantum Blog

In this article, Ed at Medics’ Money, a GP, Chartered Accountant and Chartered Tax Advisor, explores the different options for working as a locum, and shares five top tips for tackling taxes as a locum who operates as a sole trader.

Options for operating your locum business

In contrast to hospital locums, locums have different options for how to operate their locum business: 

• Employment
• Trading via a company
• Self-employment as a ‘sole trader’

Employment

You’ll most likely already be familiar with how employment works from your days as a trainee. If you locum as an employee then little will change – you’ll sign an employment contract with one or more GP practice and then receive a salary net of income tax, National Insurance Contributions, student loan payments and pension contributions. 

The majority of individuals who receive their income solely via employment are unlikely to need to file a tax return.

Limited company

As a locum, you can also choose to trade via a limited company. You would need to set up (‘incorporate’) a company and become a shareholder and director of your company. You would then invoice the GP surgeries you work at via the company. 

Companies pay corporation tax, which is lower than income tax and do not pay National Insurance; however, you would then need to take the money out of the company (unless you can afford to leave it in there) via either a salary or dividends. It’s also important to note that the income received by the company is not pensionable. 

Overall, you might end up with a lower tax liability if you trade via a company, but it’s a good idea to get professional advice before setting one up. There’s also a higher administrative burden of trading via a company, as you would need to file accounts and corporation tax returns. 

Sole trader

If you trade as a sole trader, you’ll be treated as self-employed. There are five core consequences when going down this route, which we’ll cover now:

Make sure you’re aware of your legal requirements

If you’re locuming as a sole trader, you must register with HMRC by 5th October after the end of the first tax year (5th April each year) that you start to trade. HMRC will then register you for Self-Assessment so that you can file a tax return each year by and also for Class 2 National Insurance (see below).  You could be fined if you do not do this.

The deadline for filing your tax return is 31st January after the end of the tax year to that it relates. For example, for the tax year ending 5th April 2023 the return is due by 31st January 2024.
 
You’ll need to prepare accounts, but won’t need to file them anywhere, as you’ll just need to use the information to file your tax return. You can choose any day of the year to be your accounting year end. The recommended date is 31st March, as HMRC will sync this with the tax year end.
 
It’s recommended that you set up a separate business bank account to keep your business income and expenses independent of your personal ones.

Be aware of how your tax is paid

Employees receive salaries paid into their bank accounts net of income tax, National Insurance Contributions, student loan payments and pension deductions. 

The self-employed will receive their gross income. Therefore, a tip is to take a proportion of the money that you receive each month and save it in order to pay your future liabilities. Suggestions vary as to how much to withhold, but 33% is generally thought to be sufficient.
 
You’re then responsible for paying HMRC any tax due for each tax year. This must be paid by the 31st January after the tax year end. Self-employed individuals have to pay their tax bills via the “Payment on Account” (“POA”) system – it’s very important to understand what this means.

This is a way in which HMRC collects tax from you in advance of the next tax year. In the first tax year you start to locum, you’ll work out your taxable profit for the year and then pay tax on this by the following 31st January.
 
At this point, HMRC will make you pay an additional amount of tax equal to 50% of that tax bill and then a further 50% of that same tax bill by the following 31st July. Any amounts you have paid in advance will be deducted from your next tax bill.
 
As an example, imagine you complete a Self-Assessment tax return and have a tax bill for year one to the 31 March 2023 of £1,000. Your tax payments will be as follows:

• Payment due by 31st January 2024: £1,000
• First POA (50% of tax bill) also due by 31st January 2024: £500
• Second POA (50% of tax bill) due by 31st July 2024: £500

Be aware that, if you’re self-employed, you’ll have to pay two different types of National Insurance Contributions (“NIC”). Class 2 is charged at a rate of £3.15 per week if profits exceed £6,725, whereas Class 4 is charged on your profits and is paid along with your income tax liability as above.

Pensions

If you’re self-employed, you can pension your locum work (90% of your fee) using Locum Form A and Form B. Work performed more than ten weeks ago can’t be pensioned.

Payment needs to be received by primary care support services by the 7th day of the following calendar month. For example, a January Locum B form is for income received in January and needs to be received by NHS pensions by the 7th February.

Claim your expenses

No matter whether you’re employed, self-employed or invoice via a company, many of your typical expenses should be tax deductible including:

• Professional indemnity fees
• GMC fees
• Royal College Fees
• Fees paid to the BMA
• Any exam fees (and resits), if you had to take these as part of a training contract (which may not apply if you’re currently locuming)
• Mileage allowance for any journeys for work that are not to or from your house
• Payments to the NHS pension scheme (this should happen automatically if you are an employee) 

It’s easier for self-employed individuals (and companies) to claim expenses as tax deductible as the rules are less strict than for employees. 

The general rule is that an expense is tax deductible against profits if it is incurred “wholly and exclusively” for the purposes of the trade. Tax-deductible expenses may include:

• Running a car
• Telephone charges
• Printing and stationery
• Accountancy fees

Continuing Professional Development training costs should also be allowable. As a sole trader you can also claim for the business part of expenses with mixed personal and business use, e.g. your mobile phone bill if you make calls for work.

Watch out for IR35

Each GP surgery you work for is responsible for deciding whether you would be regarded as an employee if your services were provided directly to them as opposed to through a third party. Usually third party means a company, a partnership or an individual who provides the services of another individual.

If the rules apply, you’ll be treated as an employee and taxed accordingly. While sole traders are likely to be ok, you should check with the GP services you work with that they’re comfortable to not regard you as an employee and ask for this in writing for your records.