So here we are at the dawn of a new contract. Consultants may have thought long and hard about how they will change their working arrangements, but they need to consider how it will affect their future tax bills too.

For those who take up the new contract it will, in my view, almost certainly involve longer working hours and less time available for private practice because they are required to work a minimum additional four hours before taking on independent work.

This will persuade some to give up their private work so they can spend at least a few hours a week with their family. A number of doctors have told me they are in this category, while others say they will reject the new contract and resign from their NHS posts to work entirely in the private sector.

But many will continue to balance private and NHS work, albeit with increased pressures from both sides.

FULLY NHS

There will be both positive and negative tax implications for those who decide to devote all their working hours to the NHS and cease their business as a self-employed consultant.

The extra graft for the NHS will be well rewarded but their additional salary will have 40 per cent tax and one per cent National Insurance deducted each month under PAYE. So they may not take home as much as they expected.

This move will accelerate the payment of their total tax liability but in the long term they will not have to reserve funds to make additional tax payments on 31 July and 31 January each year, as they did when they were working privately. In the short term they will need to continue to pay tax on these dates to clear the tax due on the private practice profits already made.

For those who cease their private practice it is important to accurately forecast the tax that will become due so they are not caught off-guard by an unexpected tax demand.

This calculation is not as straightforward as might be imagined because the date of the cessation will affect the timing and the size of their final tax liability.

Those who started their private practice before 6 April 1996, when the current year basis of self-assessment for tax began, may find some tax relief brought forward to set off against their final profits. But this tax relief could create a loss if they cease their private practice early in the tax year.

On the other hand, closing the business later in the tax year can mean consultants have to pay the tax due out of their net NHS salary, unless they have carefully reserved the amount due.

In reality there may not be a clear date on which their self-employed practice finishes, which can make planning of the final tax payment quite tricky.

It is best to talk to your accountant about specifics. Some consultants may also wish to continue with some academic work, such as writing or lecturing, in addition to their NHS contract.

This private income could be treated as a continuation of their self-employed practice, or as a new and separate business, depending on the exact circumstances.

FULLY PRIVATE

Those who decide to build their private practice into a full-time occupation would be well advised to look at incorporating their business - thereby becoming a limited company.

But they need to be careful. When they give up their NHS salary they must start to pay class 2 and class 4 National Insurance on their self-employed income.

Running their private practice through a company can save both National Insurance and tax, but there are many other non-tax matters to consider before deciding whether a company, a partnership or a chambers arrangement is best.

PRIVATE AND NHS

Those who continue their private practice on top of their NHS post need to check that their private fees will continue to cover the expenses connected with that work.

For instance, the fixed cost of buying medical equipment will not reduce even if they take on fewer private patients.

Due to the strict tax rules that apply to expenses set against a salary rather than self-employed income, it may not be possible to get tax relief for as large a proportion of motoring expenses as was possible in the past.

However you voted on the new contract, be sure to check out the financial implications before you decide on your next move.

Mr Sharp is a tax consultant specialising in junior hospital doctors and consultants

Summary of tax considerations

Work pattern Tax action

Full-time NHS, having Forecast final tax demand given up private work. on private practice income.

Full-time private practice. Consider incorporating private practice.

NHS contract plus some Check private practice private work. expenses are covered by reduced income.

[Article from Hospital Doctor on 04/12/03]