News spotlight on the tax burden for dentists
NHS figures recently revealed that almost 400 dentists working in England and Wales earn more than £300,000 per annum and data released by the NHS Information Centre showed that 6% of the 19,000 dentists earned a taxable income of more than £200,000 per annum.
All of you in that bracket, in fact anyone earning over £130,000 per annum, are in for a tough time from a tax point of view.
From 6 April 2010, those with taxable income of £150,000 per annum or more will be subject to a 50% tax bracket on income above this figure. Taxable income includes salary, net profit, bonuses, dividends and bank deposit interest.
Even those with income of over £100,000 per annum will be quite severely affected as the personal tax free allowance will be reduced and eroded to zero when income reaches £112,000. This gives an effective marginal rate of tax of 62%! If you are in this position, it is certainly worth considering paying a lump sum premium into a pension plan, i.e. to reduce your taxable income below £100,000.
Unfortunately this is not the end of the story as far as the bad news is concerned. The April 2009 Budget also severely limited the availability of tax relief on pension contributions. The pre Budget report in December 2009 went even further. From April 2011 onwards the new legislation will affect those with taxable income of £130,000 or more in the current and previous two tax years.
The original Budget (April 2009) had a higher income figure of £150,000 but in the December 2009 pre-Budget report, this was reduced to £130,000
This legislation will impact pension contributions for some of you in the current and next tax year i.e. 2009/10 and 2010/11, as nasty interim rules have been introduced. Many of you will be involved in the NHS Superannuation Scheme, some in private pensions and some of you may pay contributions to both.
The effect of the new legislation is that for those earning more than £130,000, the higher rate tax relief on pension contributions will be eroded to basic rate tax relief for income between £130,000 and £180,000, and at that point only basic rate tax relief on contributions will be availableSo where does that leave you as far as the Superannuation Pension is concerned?
The Superannuation Scheme is a final salary scheme and the good news is that payments made into a Final Salary Scheme are not affected in the current and next tax year as long as the way that members’ benefits are calculated under the Scheme Rules does not change on or after 22 April 2009 (for those earning £15,000 or more). For those earning £130,000 or more, the relevant date is 9 December 2009.
Effectively, as long as these conditions are satisfied, you will continue to obtain higher rate tax relief on contributions paid into the Superannuation Scheme by yourself and the government. As far as private pensions are concerned, once again if you were committed to regular monthly or quarterly contributions prior to 22 April or 9 December 2009 you can continue to pay those and obtain higher rate tax relief for this tax year and next.
What happens to the Superannuation Scheme Contributions on 6 April 2011 is not yet entirely clear but it is unlikely to be good news. The way it will probably work is that you will be limited to basic rate tax relief on your own contributions, and as far as the government contributions are concerned, i.e. ‘employer contributions’, you will have to pay 20% or possibly 30% tax on this amount. The whole thing is extremely depressing for obvious reasons!
So is there anything that you can do? Consider the following:
From August 2006, dental practices have been able to trade as limited companies. This is a more complicated trading vehicle than the usual sole trader or partnership route, but now becomes more attractive due to the tax and pension changes explained above.
It is important to bear in mind that you will pay higher rate tax on income drawn from the company either as salary or dividends. For all income left in the company, as long as the profit after your salary is less than £300,000, the corporation tax rate is only 21%. Furthermore, if you are married, and your spouse is not a higher rate taxpayer, you may wish to let him or her have some of the shares so that a proportion of the dividends could be paid to your spouse, thereby diluting the amount of income you earn and mitigating tax paid at 50%. Beware, as you will also be diluting the final salary you receive as defined in the NHS Scheme and this could affect your potential benefits adversely.
If you do make your spouse a shareholder in your company, you will obtain a tax saving due to ‘income shifting’. The Chancellor does not like this, and he has said that he intends to introduce legislation to prevent income shifting. Bearing in mind that there is going to be an election between now and May 2010, the government may have bigger fish to fry but there is no guarantee that changes to the rules will be shelved forever.
One further point; some of you may trade as Limited Liability Partnerships, LLP’s. LLP’s have to prepare Statutory Accounts for filing at Companies House. However the tax treatment of LLP’s is exactly the same as the tax treatment of regular partnerships. Therefore if you are trading as an LLP, can you take advantage of the incorporation route explained above? The answer is you can, as long as your Articles of Association allow the ‘members’ to form their own companies and the company then becomes a member of the LLP instead of the individuals. As long as the original member owns more than 50% of the new company, you can incorporate and substitute the company as member. You have probably spotted that this is now becoming quite an ‘unwieldy beast’ and you will have to be willing to cope with, and pay for, the administration of this type of organisation.
What is clear is that the UK has a huge funding problem as a whole and therefore the government of the day will unfortunately be likely to increase, as opposed to reduce, the tax burden. It is therefore sensible to start planning as soon as possible. This is a complex issue and it is recommended that you take professional advice before proceeding with any of the suggestions in this article.
For more information, please visit www.sshllp.com.