Managing Your Finances as an F3 Locum
Understanding the financial implications when you start locuming can be very difficult. You'll need to consider your tax position - avoiding paying too much, but not underpaying and ending up with a big bill at the end of the year - as well as National Insurance and pensions.
We asked Ed at Medics’ Money, who is a newly qualified GP, but also a Chartered Accountant and Tax Advisor, to share some of the most important things you should be looking out for as a new locum doctor. Medics' Money is a doctor-led business empowering doctors to make better financial decisions.
How You'll be Paid as a Hospital Locum
- Pay-as-You-Earn (PAYE) through a Trust – This is the most common method by which locums are paid. Even if you are locuming through an agency, you'll still usually be paid by the Trust on their payroll. Agencies refer to this as a “direct engagement”.
- PAYE through the agency – The agency pay you directly. This is becoming less and less common these days.
- Payment through an umbrella company – An umbrella company is a UK limited company operated by a third party acting as an “employer” on behalf of its employees. The umbrella company will provide a payroll service to the locum doctors and pay a salary after allowing for deductions. It has become far less common, as a lot of the advantages previously associated with this method have stopped. I advise you should think very, very, carefully about down this route as it is easy to fall into complications.
- Invoice through your own limited company – If you do this, you'll almost certainly want to get specialist accountancy advice.
Ed's Top Five Pieces of Advice
1) Check Your Tax Code!
Every employee will have a tax code, which is calculated by HM Revenue and Customs (HMRC) and is used by your employer’s payroll to determine how much income tax you should pay. This only applies to employees (not if you're self-employed or take dividends from a company.)
The tax code is made up of a number followed by a letter and, at its most basic, is simply the personal allowance divided by ten followed by the letter L.
The personal allowance for the tax year ended 5 April 2021 is £12,500. This means the first £12,500 of your income in the tax year is tax-free.
So, if you have one job, and no extra income or allowances altering the code, the current tax code for the tax year ended 5 April 2021 (2020/21) should be 1250L. You will also see the word “CUMU," which means that you get a chunk of your personal allowance each month. This £12,500 is split evenly throughout the year, so you'll get £1,041 of your pay tax free each month.
Your tax code can be found on your payslip, where you'll find a box saying "tax code" with the relevant number and letter. For example:
A big problem for doctors is that it's not uncommon for HMRC to tell your payroll to apply the wrong tax code. As we switch jobs in, say, August, we'll usually receive a payslip from our old employer and our new employer, confusing HMRC into thinking that we're working two jobs. If they suspect this, they'll apply something called an emergency tax code, which usually results in the tax-free personal allowance being taken away. Doctors may see:
- BR NONCUM – This will automatically tax all income at the basic rate of tax, currently 20%
- D0 – This does the same thing, but taxes all income at the higher rate of 40%
- 0T NONCUM – This takes away your personal allowance, but unlike the above does not apply a flat rate.
Note that different income tax rates may apply in Scotland.
And there's even more potential for this problem to arise for locums, because there's a chance that you'll have multiple employers. The more employers you have, the more potential for chaos, so we recommend you keep a close eye on this. If your tax code is wrong it could be a costly error, because losing your tax-free personal allowance will inevitably result in higher tax bills until the tax code is corrected. We thoroughly recommend keeping a close eye on your tax code to ensure you're paying the right amount of tax.
For a very useful guide to checking your tax code and changing it if it's wrong, you can check out this Medics’ Money blog article which provides the information you need.
2) Paying Tax
Exactly when tax is paid depends on how you set up as a locum but, as mentioned above, the vast majority of you will locum as employees of Trusts, even if you work through an agency.
If you are employed by the Trusts that you work for, things will operate much as you'll likely be used to, via PAYE with your employer applying your tax code and taking off tax (and National Insurance, pension, and student loans) each month. It could also be that an agency does this for you.
If you already have to complete a self-assessment tax return, you'll be responsible for paying HMRC any additional tax due for the tax year. This must be paid by 31 January after the tax year end, which is also the deadline for filing the tax return.
If less than 80% of your income is collected at source (for example, if you have other income such as self-employed income, rental income or dividend income where tax is not taken out before you're paid) then you'll also have to make “Payments on Account.” This is the mean way in which HMRC collects tax from you in advance of the next tax year. The first year you file a tax return and pay tax, 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 31 July. These amounts you've 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 31 March 2021 of £1000. Your tax payments will be as follows:
- Payment by the following 31 Jan 2022 – £1000
- First POA (50% of tax bill) also due by 31 Jan 2022 – £500
- Second POA (50% of tax bill) due by 31 July 2022 – £500
Then, when you pay your next tax bill by 31 January 2023, they'll deduct the two payments on account you made the previous January and July and start again.
If you contract yourself out via a UK limited company, the company itself will also have to pay tax. Companies have to complete a corporation tax return. Corporation tax is due on any profits and paid nine months after the end of your company financial year. The money then sits there unless it's taken out of the company, which can happen in two ways, either as a salary or as a dividend to a shareholder.
If a salary is taken, whoever runs the company must apply the PAYE system to the salary, deducting tax each month. If a dividend is paid out by a company, the shareholder has to pay any tax due by 31 January after the tax year end in which the dividend was paid. But it is worth noting the first £2,000 is currently tax-free.
3) Getting Tax Back on Expenses
No matter whether you're employed, self-employed, or invoice via a company, many of your typical expenses as a doctor should be tax-deductible. These could include your professional indemnity fees, your GMC fees, your Royal College fees, and fees paid to the BMA. You should also be able to claim for any exam fees (and re-sits) if you had to take these as part of a training contract (which may not apply if you’re currently locuming).
Aside from professional expenses, you can also claim mileage allowance for any journeys for work that aren't to or from your house, and don’t forget payments to the NHS pension scheme are also tax-deductible. All this should happen automatically if you're an employee.
Other than these expenses, employees have a much tougher time claiming other things as they must be, “wholly, exclusively, and necessarily for the purposes of employment.” It is slightly easier for self-employed individuals and companies, as the rules are less strict, and tax-deductible expenses may include running a car, telephone charges, printing, stationery, and accountancy fees.
If you are employed and have not yet claimed back tax on your employment expenses, you can find a handy guide to making a claim here.
4) National Insurance
For employees, you should also keep a close eye on your National Insurance Contributions (NIC) as a locum. National Insurance is complicated, so we won’t go into great detail here, but NIC is charged against salaries for employed doctors and against profits for self-employed individuals.
In the 2020-21 tax year, the first £9,500 of your salary or self-employed profits will be free from NIC, but between £9,500 and £50,000 of NIC is charged at 12% on salaries and 9% on self-employed profits. Above £50,000 2% NIC is charged.
The key thing to note is that the rates are charged on total amounts. Unfortunately, as a locum you may work for multiple people and they may charge you as if that job was your only one for NIC.
As an example, suppose you work for one employer for £80,000, you should pay NIC as follows:
Now imagine you have two jobs. Both pay £40,000 (so your total is £80,000 just like the first doctor):
You can see that in the first example you'll have overpaid NIC by £1,860 because both employers have charged NIC on the individual salary, ignoring the other. This may not happen, but watch out for it. If you think you've overpaid NIC then you can contact the National Insurance Contributions Office for help. They'll ask for the amounts of NIC you paid and if you have overpaid they will refund you.
The above may also be the case if you have both employed and self-employed income. It's the total that matters, not the income received from any one source, so you may overpay in that situation too.
Companies do not pay NIC, but note that if a salary is paid out of the company in order to extract the money in the company, employer’s NIC will need to be paid.
5) Your Pension
For those hospital locums who are paid via the hospital payroll, pension contributions will be deducted at source (like your tax) and dealt with by the Trust. You can opt-out of the NHS pension scheme and not pension your earnings if you wish, but you should think about this very carefully as it may have a detrimental impact on your final pensions benefits (for example, from losing your employer contributions), and others such as Death in Service benefits. Click here for a detailed description of the NHS pension scheme for 2015, and see page 26 for the other benefits of the NHS Pension Scheme.
You may also like to take a look at this helpful resource from Medics' Money for further guidance.
If you operate via an agency, they should deal with the relevant pension contributions, letting you know your pension position and your contributions. If you trade through an umbrella company or trade through your own limited company the income is unlikely to be pensionable.
Looking after your taxes may seem complex and daunting, but if you follow Ed's advice things should run fairly smoothly. Here's a summary of his top tips:
1. Decide how you want to be paid. Most people choose PAYE through a direct engagement.
2. Keep an eye on your tax code and call HMRC if you think there are any issues.
3. Keep organisations updated with your employers, including HMRC and the Student Loans Company.
4. If you have more than one employer, check your NI contributions to make sure you don't over pay.
This article is part of a wider series, supporting doctors like yourself with a comprehensive set of guides to ensure your F3 year is a success. These guides cover everything from initial planning, options for moving abroad, help with finding work, and tips for making the most of the experience. Click here to visit our F3 Resource Hub to explore the full list of guides and articles.
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