Hidden charges for GP surgeries with staff due to retirement & tax on un-spent PCN Funding

In this first article on healthcare accounting matters, I would like to bring the readers attention to a hidden charge that many GP’s and their practice managers were unaware was brought in by regulations effective from 1st April 2015.

Final Pay Controls and the employer charge

The new Final Pay Control regulations are now beginning to bite at surgeries that have staff that are enrolled into the 1995 section of the NHS Pension Scheme who is now or will shortly, be taking their pension benefits

Members of this section of the NHS Pension Scheme have their retirement benefits computed based on one 80th of the highest pensionable pay during their last three years of service. The NHS Business Services Authority (NHSBSA) believe this allowed manipulation of pension benefits by giving excessive pay awards at the end of an employee’s service.

The regulations were introduced in an attempt by the NHS to reduce its exposure where members benefits are disproportionate to the pension contributions throughout the entirety of their service. Given that NHS pensions are not funded and paid from current contributions the motivation for this move is not hard to understand.

From 1st April 2015, If a member of the 1995 Section of the  NHS Pension Scheme is given a pay rise in any of the last three years of service that exceeds the ‘allowable amount’ the surgery can be invoiced an ‘Employer Charge’ by the NHSBSA following the staff members retirement. Too many surgeries come as an unpleasant, expensive, and unexpected shock.

On retirement, the NHSBSA will look at each of the final three years of the employee’s service and compare any salary increases in each of these years with the ‘allowable amount’ computed as the previous year’s salary, uplifted by CPI+4.5%. Any increases that exceed this amount, in any of the final three years’ service, will result in an ‘Employer Charge’ being invoiced to the employer.

The ‘Employer Charge’ is calculated by working out the annual additional pension benefits the staff member will receive on any salary in excess of the ‘Allowable Amount’ and multiplying this by a factor based on the employee’s age at retirement. (These factors range from 24.1 for an employee retiring at age 50, to 13.48 for an employee retiring at age 75).

This amount can become very large, e.g. an employee retiring at age 60 who has a salary in 2016 of say £25k, of £27k in 2017, £29k in 2018 and £33k in 2019 would result in a charge to their employer by the NHS on their retirement of £20,528.46.

There are a couple of exceptions to this charge that cover the sad situation where employees take death in service benefits or where an employee starts a ‘genuinely new employment’ with a new employer at a higher rate of pay. The situation where a salary increase is due to a salary sacrifice scheme that commenced before 1st April 2014 is also exempted.

In situations where an employee has multiple pensionable employments the employer who gave the increase is, rightly, the one that is charged.v

Clinical Excellence Awards are not exempt from this charge and will be invoiced to the employee’s local employer, however, ‘employer charges’ relating to National Clinical Excellence Awards will be funded by the body funding the award.

In practice, when speaking with GP’s and practice managers most of them are blissfully unaware of the existence of these new rules and a number have inadvertently found themselves in situations where these charges will apply. Other surgeries have received the shock of employer charge invoices without any warning.

The regulations are not difficult to understand, the problem is a lack of awareness. If you act for any GP’s you should ensure they are aware of this pitfall so that they can manage their exposure to any potential charges and avoid any very unpleasant surprises in the future. I am sure they will thank you for this advice.

Tax Bills on un-spent PCN Funds

If you have any GP clients whose surgery is a member of a PCN that has not utilised all of its funding received you should make your client aware that HMRC will regard your clients share of these unspent amounts as taxable income.

Primary Care Networks were introduced in 2019 and all GP surgeries are obliged to be a member of one. They are intended to receive funding for services that individual surgeries would find un-economic to provide. These services are to be shared between the member surgeries and may include additional nursing staff, community prescribers and clinical pharmacists. It is understood that in future more and more of surgery funding will be directed through PCN’s

It has however come to light that many PCN’s are holding large sums of unspent cash that will be treated as income of the member surgeries if it has not been spent, or if a legally binding arrangement, to spend it had not been entered into by 31 March 2020.

This is a surgery profit and will also need to be disclosed on your client’s surgery website as part of partner net earnings.

As this is also ‘NHS pensionable income’ it may also result in higher than expected superannuation bills and have a knock-on effect with pension annual and lifetime charges.

The good news is that recruitment funding will not be included in these profits however all other funding streams will be included such as the ‘network participation payments’.

HMRC have commented that for any unspent amounts to be treated as relating to committed expenditure ‘your client needs to have committed legally or constructively to spending the funds, so for example putting in an order for something and getting an invoice’.