The Autumn Statement was released on 17 November 2022, which saw the announcement of tax thresholds frozen or cut and an increase in tax liabilities for tax payers over the coming years. For self-employed dentists or shareholders of a dental trading company, these changes will have different impacts on your tax liabilities but there are several ways of reducing the impact.
There are a number of common recommendations for saving tax, these include:
- Paying more into your pension scheme (provided you aren’t at risk of exceeding the pension annual allowance or lifetime allowance).
- Ensuring you claim all relevant business expenses against your business income to reduce your business profits and tax liabilities.
- Ensuring all charitable donations are donated through gift aid and included on your tax return.
These are all great and you should definitely be doing them, but there are other innovative ways to save tax that you can incorporate into your dentistry tax planning each year. Tom Slevin, Dental Client Service Director and NASDAL member, is here to talk you through it.
Enhanced reliefs on investments
HM Revenue & Customs currently give enhanced tax relief on investments made into Venture Capital Trusts (VCT) and new shares bought in companies through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
VCT
A maximum of £200,000 can be invested in VCTs each year, with 30% of the investment deducted from your tax liability in that year. An investment of £10,000 into a VCT would see your tax liability reduce by £3,000, reducing the actual cost of the investment to £7,000. If you go down this route, you should be aware that you will need to hold the VCT shares for a minimum of 5 years or the income tax relief will need to be paid back.
Dividends paid by VCTs are also tax exempt, providing ongoing tax efficiencies from this investment which is enhanced with the dividend tax free allowance reducing from £2,000 in 2022-23 to £1,000 in 2023-24, and further still in 2024-25 to £500.
Any gains made on sale of your VCT shares are exempt from Capital Gains Tax (CGT).
EIS/SEIS
The maximum annual investment you can make in EIS shares are £1 million, although this can be increased to £2 million if at least £1 million of the investment is in knowledge intensive companies. 30% of this investment can be claimed as income tax relief.
The maximum annual investment in SEIS shares is lower at £100,000 but 50% of the investment can be claimed as income tax relief.
Returns from EIS/SEIS shares are most likely to be through capital growth rather than dividends, and there is no tax relief available on dividends received.
If you claim the income tax relief on these shares, you will normally pay no CGT when selling your EIS/SEIS shares.
If you have capital gains, investing in EIS shares with your gain can also defer the CGT due for as long as you hold the EIS investment. Selling the EIS investment will then trigger the CGT to be payable, but you do have the option to invest again into another EIS investment to continue to defer the gain.
Inheritance tax relief is also available on EIS/SEIS shares, provided the investment is held for at least two years at the time of death.
If you make a loss on your EIS/SEIS shares, you can also claim loss relief against Income Tax. If for example, you invested £20,000 in EIS shares and claimed the 30% income tax relief, the effective cost of the investment is £14,000. If you sell the shares for £10,000, the £4,000 effective loss can be claimed against your income. A 40% income tax payer will therefore reduce their income tax liabilities by £1,600.
Before proceeding with these investments, I’d highly recommend that you talk to an Independent Financial Advisor as these investments will only form part of your overall investment strategy and you need to be aware of the other benefits and risks of investing in VCT/EIS/SEIS.
Investing in the AIM market
For those of you looking at ways to reduce your inheritance tax, with inheritance tax thresholds being frozen again at £325,000 until April 2028, investing in shares in the Alternative Investment Market (AIM) may be a way of moving some of your estate out of the scope of inheritance tax. Purchasing certain AIM shares provides 100% relief from Inheritance Tax.
AIM shares can also be held in stocks and shares ISAs, which then removes any income tax liabilities on dividends received and there will be no capital gains tax due on gains made on these shares if sold.
As with VCT/EIS/SEIS investments, again, you should always speak to your IFA before proceeding with this kind of investment.
Maximising ISA contributions
The Autumn Statement also saw a reduction in the dividend tax free allowance, taking it from £2,000 to £1,000 in 2023-24 and then £500 in 2024-25. The Capital Gains exemption was also reduced a from £12,300 to £6,000 in 2023-24and £3,000 in 2024-25. Although there was no change in the personal savings allowance of £500 for higher rate and £0 for additional rate taxpayers, the additional rate tax band was reduced from £150,000 to £125,140. This stealth move will see thousands of taxpayers lose their £500 personal savings allowance.
Up to £20,000 can be paid into your ISA each year and is a tax efficient way of reducing your future tax liabilities. Dividends paid on shares held in a stocks and shares ISA are tax exempt, as are gains made on the sale of shares. Interest received in a cash ISA are also exempt from income tax.
A cash ISA paying annual interest of 2.5% on a £20,000 balance will pay interest of £500. For additional rate taxpayers, they would need to receive £910 of interest on a £20,000 balance (or an interest rate of 4.55%) to receive £500 net after income tax. As you build your investments in a stocks and shares and/or cash ISA, the tax efficiencies grow year-on-year.
Utilising your capital gains annual exemption amount
With the capital gains annual exempt amount remaining at £12,300 until 5 April 2023 and then falling in subsequent tax years, now is the time to look at your investments and determining whether some of the gains should be crystallised in this tax year. A gain of £10,000 crystallised this tax year will see no capital gains tax payable, yet a gain of £10,000 crystallised in the next tax year would see capital gains tax due of £800. If this gain isn’t crystallised until the 2024-25 tax year, the capital gains tax liability increases to £1,400.
Utilising your capital gains annual exempt amount each year can save you thousands over your lifetime in capital gains tax, as well as being able to invest more of your gains back into other investments and seeing increased investment gains.
You do need to be aware however of the ‘bed and breakfasting’ anti-avoidance rules. If you sell shares or funds, you cannot buy the same shares or funds in the next 30 days or share matching rules prevent the gains from being crystallised. One way around this is to sell the shares held in your own name to crystallise the gain and then immediately buy them back within your stocks and shares ISA, protecting future gains and dividends on those shares as well as utilising your capital gains annual exempt amount.
If you do sell shares and the gain is higher than your annual exempt amount, you do have the option of reinvesting this amount into EIS shares to defer the gain and achieve the income tax relief.
Associate dentist limited companies
Corporation tax rates are rising from April 2023 for companies with profits higher than £50,000. The first £50,000 of profits will be taxed at 19%, with the next £200,000 of profits taxed at an effective tax rate of 26.5% and profits above £250,000 taxed at 25%.
Many associate dentists operating through a company will have profits in the £50,000 to £250,000 region and tax savings can be made at 26.5%. We commonly see associate dentists not using their annual £300 trivial benefits or their annual event exemption of £150 per head. These are tax deductible expenses for the company that associate dentists can use to reduce their corporation tax bill. These apply to each director/employee of the business. The dentist will also then take less dividends from the company, reducing their income tax liabilities.
Remuneration structure from your limited company
Dental practice owners where the practice is owned by their company, have more freedom to choose how to pay themselves.
The most common remuneration strategy is to pay yourself a salary of £9,096 or £12,570 depending on the type of practice and whether the employment allowance is available, with the rest of the income being paid out as a dividend. This works for many practices but for some dental practice owners more can be done to save themselves both Corporation Tax and Income Tax.
If the dentists only income is their salary and dividends from the company and elsewhere, interest could be paid on their directors’ loan account balance, generating interest income for the dentists and potentially utilising the remainder of their personal allowance, starting rates for savings and personal savings allowance if available. This could save the dentist hundreds to thousands in income tax and corporation tax each year. The dentist should ensure they are filling out the correct HMRC paperwork if paying themselves interest on their directors’ loan account.
As you can see, there are many different ways you can save tax in the short and long-term with many more strategies not included here. If you are a dentist looking to maximise your tax savings each year, our specialist team of accountants and our partners at Wealth Experts can help you with your accounts, tax, pensions and investments. For more advice, get in touch with us at [email protected].
