Ceasing contributions to the NHS Pension – what are the partnership implications?
There are many reasons why a partner may decide to stop contributing towards the NHS Pension – from 24hr retirement, to approaching the ceiling of the lifetime allowance, or simply deciding to make other pension arrangements.
At DR Solicitors we are receiving an increased number of enquiries from partnerships seeking clarity on this matter, as stopping contributions is becoming more common.
The good news is, it’s a relatively straightforward process. The key is to have an accountant who understands the NHS pension scheme and a Partnership Deed which correctly defines the allocation process.
The main areas that can sometimes lead to confusion are:
The role of NHSE
NHSE pays the contract sum to the practice net of estimated pension contributions. NHSE then pays these withheld contributions across to NHS Pensions. This payment is sometimes referred to as the ’employer contribution’ but this is incorrect. NHSE is simply paying across the partner contributions on behalf of the individual partners who are members of the scheme.
How pension contributions are treated in the accounts
If NHSE didn’t make these payments, the contract sum would be paid gross to the practice and the individual partners would make the contributions instead. A common mistake is to forget that practice income is not the monies actually received from NHSE, but rather the monies received PLUS the pension contributions withheld. It is this gross amount which should be shown in the accounts and split in profit sharing ratios.
The pension contributions should then be treated as an expense attributable to individual partners. As such, when a partner ceases to make contributions, the expense will disappear and so the net profits they receive will increase.
The only way this process can give rise to problems for a practice is if income is shown as the net amount received, rather than being grossed up with the withheld contributions. This would, however, be an error in the accounts and contrary to accounting policy.
A simple worked example
Imagine a two-partner practice operating with a 50/50 profit share, where Partner A contributes £100 towards the NHS pension and Partner B contributes nothing:
- The practice receives £900 from NHSE (the contract sum minus £100 pension contribution)
- Practice income = £1000
- Partner A net profits = £400
- Partner B net profits = £500
The Partnership Deed
The Partnership Deed simply needs to state that all pension contributions are an individual expense. It may also state that all income should be shown gross, but this is normal accounting policy so is not strictly necessary. There will be other circumstances that the deed needs to cover, such as dealing with over and under accruals on retirement, but that is a topic we will cover in more detail at a later date.
Allocating pension contributions is an area that any specialist accountant should be familiar with, and only a poorly drafted Partnership Deed would get wrong, but if you’re at all unsure then please feel free to get in touch and we’d be happy to help you.
For more information, please contact Nils Christiansen on 01483 511555 or email email@example.com