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It is worth understanding how dentists tax free income can be maximised

With the announcement in the Budget that the dividend allowance will reduce from 6 April 2018, and following the removal of the tax credit on dividends from 6 April 2016, it is worth revisiting other opportunities for tax efficient remuneration from an incorporated dental practice.

For basic rate taxpayers with non-savings income (i.e. pension income, salary, rents or self-employed income) within the personal allowance, it is now possible to receive up to £6,000 of interest, tax free, by taking advantage of the “starting rate” for savings.

Example:

Peter has lent his company some funds and has a director’s loan account with a balance of £100k. In 2016/17, he takes a salary of £8,000 (i.e. non-savings income at a level where no NI is payable either), interest on his loan account of £9,000, and dividends of £5,000.

His personal tax calculation looks like this:

Earned income (non savings) :8,000
Interest (savings): 9,500
Dividends (dividends): 5,000
Total income :22,500
Less: Personal allowance:11,500
Taxable Income : 11,000

Personal savings allowance 1,000 at 0%
Starting rate for savings 5,000 at 0%
Dividend allowance 5,000 at 0%      

Peter can, therefore, receive £22,500 from his company completely tax free, and he will receive a repayment of £1,900 in respect of the tax deducted at source by the company from his loan interest.

This example can be taken further, increasing dividends to £82,500, taking total income to a level of £100,000 which fully utilises the basic rate tax and higher rate tax band but avoids any loss of personal allowance (income over £100,000) or additional rate tax (income over £150,000)

The personal savings allowance and the starting rate for savings, along with the spare personal allowance after taking into account the salary means that there is £22,500 of tax free income as shown above and the tax liability on the balance of £68,000 of dividends is as follows:

Example

Total income 100,000
Less: Personal Allowance 11,500
Taxable Income 88,500

Personal savings allowance (reduced to £500) £500 at 0%
Starting rate for savings 5,000 at 0%
Dividend allowance 5,000 at 0%
Basic rate tax on savings £500 @ 20% £100
Basic rate tax on dividends £22,500 @ 7.5% £1,688
Higher rate tax on dividends £55,000 @ 32.5% £17,875

Total tax of £19,663 against which the tax deducted from the company interest will be deducted, giving a tax liability of £17,763. The effective ‘personal’ tax rate on £100,000 of income being 17.8%.  Careful consideration of the company tax position and linking this with pension planning will minimise the corporation tax exposure too. If you would like more advice on being able to take funds out of your company, whilst minimising your tax costs, please get in touch with Nick Hancock and his team, dental specialists at Albert Goodman in Taunton.

dentists tax free income

 

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