Happy New Tax Year!

Best foot forward

When it comes to minimising tax contributions, your first thought might be about tax planning. This is the analysis of a financial situation that allows you to put certain actions into motion to legally pay the lowest taxes possible, and be tax efficient.[i]

This is not tax evasion, wherein you act against the law, or even tax avoidance, where you aggressively or abusively subvert the letter of the law to your own advantage.[ii]

Taking charge of your finances early in the year allows you to account for every pound of income you earn. But first, you must understand how much of your income is taxable and judge which tax thresholds you meet.

Understanding your tax bands

Individuals are not charged on the first £12,570 of their yearly income, but should they earn over £100,000, this allowance will decrease. For every £2 you earn over that limit, your personal allowance drops by £1.[iii] If you receive more than £125,140 in a given year, the allowance is effectively dissolved.

In England, the tax bands changed for the 2023/24 period – whilst the 20% basic rate remained between £12,571 and £50,270, the higher 40% rate saw the bracket shrink to between £50,271 and £125,140.ⁱⁱⁱ The ceiling was down from £150,000, which had been the maximum boundary since its implementation in 2010.[iv]

Beware this bracket’s seemingly innocuous 40% tax rate. Whilst it is high, you may think it is manageable. However, it could become a 60% tax trap when you consider the reduction of your personal allowance kicking in at £100,000, taking this previously protected income immediately from a 0% rate to a 40% rate. With this in mind, for every £1,000 you earn above £100,000, up until £125,140, you would owe £600 in tax. Past that limit, individuals will pay a flat rate of 45% on any income earned.ⁱⁱⁱ

Claiming expenses

Tax planning can manifest in many different ways. The most appropriate course of action will depend on your income and unique financial situation, and you should consult a specialist financial advisor or accountant who completely understands your aims before making any decisions.

Claiming tax relief on work expenses may be suitable for many dental professionals. This requires you to spend money on something related to your role in dentistry, meeting a strict ‘wholly, exclusively and necessary’ test.

Generally, ‘wholly’ and ‘exclusively’ mean your investment cannot serve both a business and a non-business purpose.[v] The ‘necessary’ means that someone couldn’t provide your care without that investment, for example, implant dentistry couldn’t be performed without paying for and undertaking a relevant course that equips you with the fundamental clinical skillset.

If you are self-employed, allowable expenses could include anything from a training course to new equipment, or even advertising and travel costs. [vi] When you claim on an allowable expense as a self-employed professional, this is deducted from your taxable turnover. This may be extremely beneficial if you are on the boundary of a tax bracket, and wish to redirect your taxable income.

Say you earned £105,000 over the tax year. If you spent and were able to claim £10,000 in expenses, your taxable income would drop to £95,000. You would regain the entirety of your personal allowance, and miss out on the aforementioned 60% tax trap. Overall, you would save £5,000 from your tax bill, which you may consider better spent on your own care provisions.

The right advice

As you look online, you may find a variety of sites offering tax planning advice that often seem confusing – they reel you in with talk of pension schemes, before it all becomes extremely complex. You must only make decisions when you are well informed and have a complete understanding of your financial situation and taxation responsibilities.

Consulting financial advisors is essential in this process. When you speak to the money4dentists team, who works closely with the sister firm accountants4dentists, you receive specially tailored advice from experienced professionals who know dental finances like no-one else. The team has dedicated their support to dentists for decades, and provide a free consultation to begin your journey towards efficient and safe tax planning.

Whilst the process is often complex, engaging in tax planning early into the financial year is essential to making the most of your savings. With help from professionals you trust, you could be better distributing your hard-earned income in no time at all.

For more information, please call 0845 345 5060 or 0754DENTIST.

Email info@money4dentists.com or visit www.money4dentists.com

Richard T Lishman – Managing Director of the 4dentists Group of companies

[i] Kagan, J., Brock, T., Jasperson, H.D., (2023). Tax Planning: What It Is, How It Works, Examples. Investopedia. (Online) Available at: https://www.investopedia.com/terms/t/tax-planning.asp [Accessed February 2024]

[ii] Seely, A., (2021). Tax avoidance and tax evasion. House of Commons Library. (Online) Available at: https://commonslibrary.parliament.uk/research-briefings/cbp-7948/ [Accessed February 2024]

[iii] HM Revenue & Customs, (2024). Income Tax rates and allowances for current and past years. GOV.UK. (Online) Available at: https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past [Accessed February 2024]

[iv] HM Revenue & Customs, (2022). Rates of Income Tax. GOV.UK. (Online) Available at: https://www.gov.uk/government/statistics/rates-of-income-statistics [Accessed February 2024]

[v] HM Revenue & Customs, (2024). EIM31660 – The general rule for employees: expenses: wholly and exclusively. HMRC internal manual, Employment Income Manual. (Online) Available at: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim31660 [Accessed February 2024]

[vi] GOV.UK, (N.D.) Expenses if you’re self-employed. (Online) Available at: https://www.gov.uk/expenses-if-youre-self-employed [Accessed February 2024]