The UK tax system is complex, and with most dentists in the UK trading as either self-employed, in partnership, or through a limited company, this can be even more of a minefield to try to ensure you are aware of the various thresholds that are important for tax.
To run through the income limits that you need to be aware of as a dentist, we’ve asked Senior Client Manager, Helen Wilson, to explain more.
Over to Helen
As said above, there are several tax thresholds that are dependent on your employment status, which can be a bit of a head scratch to understand. I’ve outlined below what you need to be aware of depending on which stage you are at in your dental career.
Student loan threshold
Many young dentists will have student loans to pay. In England and Wales, dentists are likely to have a plan 1, plan 2 or possibly both types of student loan plans. Those who started their degree before 1st September 2012 will have a plan 1 student loan, whereas those who started their degree after this date will have a plan 2 student loan.
I won’t go into too much detail on student loans, but if you do have any questions in regards to student loans payment plans, we have a previous article on student loans which can be found here.
The income threshold before starting to pay your student loan is £22,015 for plan 1 student loans and £27,295 for plan 2 student loans. Once your income exceeds these thresholds, 9% of your income will be deducted for student loan payments.
High Income Child Benefit Charge
If you have children and you or your spouse’s adjusted net income is higher than £50,000, then you may be faced with repaying some or all the child benefit that you receive.
This tax charge was introduced in 2013 and has been widely criticised for many taxpayers who weren’t aware of the tax charge. Where a family is claiming child benefit, if one of the parents has an adjusted net income of more than £50,000 some or all the child benefit will be repayable. For every £100 earned over £50,000, 1% of the child benefit is repayable. For taxpayers with income over £60,000 all the child benefit is repayable.
If you were liable to pay back your child benefit, a self-assessment tax return used to be required, but there are plans for this tax charge to be collected through the PAYE system for taxpayers who would not ordinarily be required to prepare a tax return.
Higher rate tax
The next tax trap is at income levels of £50,270. This is the current threshold where the tax rates increase from the basic rate of tax to the higher rate of tax. For non-savings income, such as self-employed profits, employment income and rental income, this is an increase in income tax rate from 20% to 40%. For dividend income, this is a rise from 8.75% to 33.75%.
Paying into private pensions and making charitable donations through gift aid will increase the £50,270 threshold, resulting in more of your income being taxed at the basic rate of income tax.
£100,000 and the loss of personal allowance and even more for some parents.
The next threshold to be aware of is when your income hits £100,000 or above. At this level of income, you begin to lose your personal allowance. Your personal allowance is your tax-free allowance and is currently £12,570. For every £2 that your income is above £100,000, you lose £1 of your personal allowance. This means that once your income is £125,140 or higher, your personal allowance will be reduced to £0. The result is that for income earned between £100,000 and £125,140, there is an effective tax rate of 60%(!) on your earned income.
Like with the £50,270 threshold, making private pension contributions or making charitable donations increases the £100,000 threshold, and reduces the tax you will owe. There is another nasty surprise for some taxpayers if their income is higher than £100,000: the loss of eligibility of tax-free childcare and the loss of 30 hours free childcare for English taxpayers. If you have a tax-free childcare account, the government will pay in £2 to this account for every £8 paid in by the taxpayer. The maximum paid in by the government is £2,000 in a tax year.
Unlike the loss of the personal allowance, this is all or nothing if your adjusted net income is more than £100,000. If you earn £100,001 in the tax year, then the government will not contribute into the childcare account. This loss of up to £2,000 per annum is per child into the tax-free childcare account plus the cost of up to 30 hours free childcare if your child is 3 or 4 years old.
If you are contributing to a tax-free childcare account, it is important to calculate your income/profit prior to the tax year end so you can reduce your adjusted net income below the £100,000 threshold as the costs of having profits above this level for some taxpayers can be astronomical.
The additional rate tax threshold
At £125,140 of income, the higher rates of tax increase from 40% to 45% on non-savings income and 33.75% to 39.35% on dividend income.
Tapering of the pension annual allowance
The last threshold to be aware of is for the highest earners and relates to the pension annual allowance. The pension annual allowance is currently £60,000, (£40,000 in 2022-23) but for taxpayers with a threshold income (taxable income before allowances less pension contributions) of more than £20,000 and an adjusted income of more than £260,000 (adjusted income for most dentists will be threshold income plus gross private pension contributions made plus NHS pension input for the year), the pension annual allowance reduces by £1 for every £1 your adjusted income is over £260,000. This tapering of the pension annual allowance occurs until your adjusted income is more than £310,000 and your pension annual allowance reduces to £10,000.
The tapering of the pension annual allowance can be a significant cost, either as a payment of the tax personally or the pension scheme paying this on your behalf and reducing future pension benefits. If your profits and other income are higher than £200,000, you should be aware of the tapering of your annual allowance as this will affect your retirement planning.
Here to help
Our dedicated dental specialist team is here to help you with any questions you have regarding any of the tax thresholds mentioned above, how we can help you plan around these and any other financial or tax questions you have. To speak to our team on how we can assist, give us a call on 0151 348 8400