Over the course of an 11-part series, the 4dentist group will explore ways to tackle a number of personal and professional challenges by providing advice and guidance to fictional character Dr Mo Lar (see what we did there?).
In this article (the fourth in the series) we look at how he could legally reduce his tax bill.
Dr Lar operates as a sole trader – in other words, he is classed as the exclusive owner of his own business and is entitled to keep all profits after tax and National Insurance. What he takes home will depend on which Income Tax bracket he falls into. Now that he has some experience as an associate, his earnings will be in the region of between £60,000 and £100,000, which means he falls into the Higher Rate Threshold (HRT). Once he starts earning above £100,000, however, his Personal Allowance – the level at which Income Tax begins to be paid – will be reduced by £1 for every £2 of income above this limit. For the tax year 2017/18, the Personal Allowance is £11,500. As for National Insurance, Dr Lar falls into the Class 4 category, which means he is required to pay 9 per cent on profits between £8,060 and £43,000.
One way in which Dr Lar can pay less tax and save money is to make sure he claims all of his tax-deductible expenses, such as subscriptions and technical journals, lab costs and hygienists fees, course costs, payments to charity, equipment, uniforms and accountancy and management consultancy fees. As a sole trader, Dr Lar is also eligible to claim a percentage of the running costs of a car as long as he keeps detailed mileage records. It is important to note, however, that travel between home and the surgery is not classed as a business journey.
If Dr Lar plays it smart with his tax payments, he could minimise his tax even further. Because he is self-employed he is able to select when his accounting year ends. Choosing a date early in the tax year would give him more time to prepare his accounts and longer to pay the amount of tax due. If in the event it looked like Dr Lar would be earning less than the year before, he could apply to reduce any payments on account due to HMRC – in other words, any advance payments towards his tax bill. For the best results it is always best to utilise the services of a specialist dental accountant.
There are a number of savings that can be made outside of work too. At this stage in his life, Dr Lar is not married and has no children, which means if he wanted to make some extra cash he could rent a room in his property. The Rent a Room relief would mean he could receive up to £7,500 in rent each year from a lodger, completely tax-free. When he does decide to marry, he could consider transferring his investment assets to his spouse, if they are in a lower tax bracket.
In the meantime, the best option for Dr Lar would be to mitigate tax through maximising his pension and Independent Savings Account (ISA) Annual Allowances (AA). For the tax year 2017/18, the pension AA is £40,000, so to get the most from his money with no tax implications, Dr Lar should think about investing some of his earnings into his pension pot. If in the event he were to exceed this amount, he would be taxed on the excess at his highest marginal rate. If his salary is increased and he starts earning above £150,000 he would be subject to the Tapered Annual Allowance. At £210,000, for instance, Dr Lar’s AA would be reduced to just £10,000. As such, it is worth considering how he could leverage his money to his advantage, especially as he plans on purchasing his own practice in the future.
In regard to Dr Lar’s ISA, he should ensure that he makes full use of the AA, which is £20,000 for 2017/18. With the added benefit of no income tax on the interest or dividends and all profits from ISA investments are exempt from Capital Gains Tax, this is a great way to legally reduce a tax bill.
While there are a number of ways in which mitigation can be achieved, the process can be extremely complex and confusing. As such, it is always best to employ the help of specialist accountants and Independent Financial Advisers. Dentists like Dr Mo Lar may have to invest in help from the experts, but it will save him money in the long run.
Next issue: Dr Mo Lar gets married and starts a family.