Michael Lansdell from Lansdell & Rose medical and dental accountants talks this month on ways to minimise your tax by maximising your allowances.
Having worked with doctors and dentists for 20 years+, I know how important financial security is. It falls hand in hand also with paying the minimum tax possible.
Understanding the tax breaks and allowances available to you will invariably help you make more informed decisions regarding your practice, your finances and your tax.
2015/2016 tax rates and allowances
Each year the allowances vary so financial and tax guidance never remains static. It is therefore vital to keep a close eye on everything if you want to achieve the best results. Getting a good grasp on which allowances are working in your favour each tax year will help you be strategic in your approach.
Free download: Lansdell & Rose Tax Tables 15/16
Tip 1: Maximise your tax free savings
ISA’s
ISA’s are a well know tax-free savings vehicle used by many, probably most, doctors and dentists as a way to earn interest income without incurring tax charges. Maximising the annual allowance each year, for both you and your spouse, is recommended, where excess funds are available.
15/16: the ISA allowance is £15,240, which monthly works out at £1,270.
Get tax savvy! If you haven’t been saving £1,270 so far, you can always add an additional lump sum between now and the end of the tax year to meet the limit.
Tax free savings
As an alternative to ISA’s, from April 2016, regular savings are also to receive additional tax breaks. Basic rate tax payers can earn up to £1,000 in interest income and pay zero tax. For higher rate tax payers, it’s £500. For basic rate tax payers this means that they would need to have a savings account balance of £50,000+, paying interest at 2%, in order to be subject to tax.
It could mean basic rate tax payers with moderate savings may find a better rate of interest outside of an ISA, with easier access. Darren will be able to help clarify the best options for you.
Tip 2: Use your pension allowance to avoid higher rate tax
Payments into a personal pension can help to avoid paying higher rate tax.
Higher rate tax payers get an additional 20% pension tax relief on top of the 20% received as a basic rate tax payer, meaning more income can be taxed at the effective rate of 20%. Contributions benefit the pension pot and avoid, or minimise, paying higher rate tax to HMRC.
It is important to kep an eye on contribution levels as there is an annual and lifetime allowance for pension contributions, both of which have been declining.
Read more: Download the latest copy of Talking Money where I discuss more about how you can claim your share of pension tax relief.
Tip 3: Pay pension contributions to keep your personal allowance
Those earning more than £121,200 a year, are not entitled to claim the usual personal allowance.
15/16: the personal allowance is £10,600.
Legislation states that the personal allowance is reduced by £1 for every £2 earned in excess of £100,000 resulting in income being taxed at 60% between £100,000 and £121,200. This equates to over £12,500 in tax on £21,200 earnings!
However, by paying £21,200 into a pension, it is possible to reclaim your personal allowance and claim tax relief on the pension contribution.
Lansdell & Rose are specialist medical and dental accountants with a key focus on tax planning for healthcare professionals.
Contact Michael today for bespoke tax advice
Tip 4: Use pension allowances for previous years
There is an annual allowance for pension contributions.
15/16: the annual pension allowance is £40,000.
This was reduced in 2014 from £50,000, however, you are able to carry forward allowances for three years. Subject to any contributions you have made in those years already, there is the potential to invest a maximum of £190,000 before April 2016.
(2012, 2013 & 2014: £50,000 per year + 2015: £40,000)
There is a Lifetime Allowance to factor in as well.
15/16: the lifetime pension allowance is £1.25m, reducing to £1m in April 2016.
As the allowances are following a declining trend, it is worth considering additional investment now to maximise these previous year’s allowances whilst the opportunity is available.
This needs discussion with your accountant and financial adviser to confirm the calculations.
Tip 5: Use your Capital Gains Tax annual allowance
Profits on certain investments, like stocks and shares, are liable to Capital Gains Tax (CGT).
Cashing in on these investments all at once can create a large CGT bill if you have accumulated a significant increase in the value, a gain, from purchase to sale.
However, everyone is given a CGT annual allowance and using this each year to carefully spread gains over various tax years can save tax in the longterm.
15/16: the CGT annual allowance is £11,100.
It takes careful planning to ensure financial assets are being bought and sold at the right time to minimise tax. Work with your accountant and financial adviser to gain the best results.
Dental & Medical Financial Services work alongside many other healthcare specialists to give you access to the best advice. Please call our team today to get connected.
Tel: 01403 780 770