As we all breathe a sigh of relief after our 2021-22 tax returns have been submitted, it is worth looking ahead to see how you can save tax. Partner, Alec James gives ten tips to boost your finances before the end of the tax year.
With the tax year shortly drawing to a close, whether you have self-employed income or trade via a limited company, now is a good time to review your position for both the current tax year and the tax year ahead.
The combined impact of lowering the threshold of 45% additional rate for the personal income tax rate and increased corporation tax rates from April 2023 means that careful planning should be done now to help mitigate the impact of this.
Below are ten top tips to consider before the end of the tax year:
1 Allowance tapering
By now, most doctors are familiar with the tapering of the personal allowance and pensions savings annual allowances. With these in mind, it is worthwhile reviewing your estimated taxable earnings position, particularly in relation to the pension savings annual allowance.
The impact of having adjusted income being in excess of £200,000 can cause significant tax implications.
A review of this may mean that you consider your trading structure, dividends or even scaling back on income to avoid exceeding a threshold.
If you operate your private practice as a sole trader, then you may wish to contemplate accelerating capital expenditure in order to retain an allowance.
2 Trading status
While you are reviewing your projected profits from your private work, it is worth assessing the way you are trading.
For example, if you are self-employed and you are likely to be tapered on your annual allowance, it may be beneficial to form a partnership or limited company.
Likewise, it may be that a limited company is no longer beneficial to you and you consider becoming a sole trader or partnership.
These discussions should always be held with a specialist medical accountant, as there is not a ‘one size fits all’ solution.
3 Dividend planning
Extractions of company profits paid to shareholders are called dividends. Dividends are taxed based on the date they are declared rather than the date they are paid.
You should consider your plans for any dividend you may wish to declare before 5 April 2023 so that they are included within the 2022-23 tax year.
It is important to remember that the dividend tax rates are reducing from 6 April 2023 but the tax-free dividend level is also reducing. Careful planning should be made with an accountant to discuss any potential extractions from the company.
If you have a company with ordinary shares, it may be worthwhile changing the ownership of the company or restructuring the shares issued to allow for variable dividends which may allow you to pay tax-efficient dividends.
4 Increase in corporation tax rates
From 1 April 2023, the corporation tax rates are changing. Smaller companies with profits less than £50,000 will remain unchanged, but those with profits of more than this will see an increase in corporation tax.
Any company with profits in excess of £250,000 will pay corporation tax at the highest rate of 25%. Those that fall in between the two rates, as many private practice companies do, will see the impact of marginal rates.
The effective impact of this is that the profits between £50,001 and £250,000 are taxed at an effective rate of 26.5%.
One may assume that it would therefore be logical to have multiple small companies which each have profits of less than £50,000. However, there are rules in place to prevent this.
Any companies which are similarly owned are deemed to be ‘associated’ for corporation tax purposes. This means that the limits are spread among the number of associated companies. For example, if three companies were associated for corporation tax purposes, you would find that the lower rate band of £50,000 would become £16,666 for each company.
With this in mind, if you have multiple companies, it may be worth considering if this is the best trading structure for you.
It may also be worth considering changing the year-end of the company in order to ‘lock in’ the lower rates of corporation tax. Discussions like this should always be done with an accountant.
5 Capital expenditure
For those with limited companies, until 31 March 2023, certain capital expenditure currently qualifies for tax relief on 130% of the costs incurred and it is called ‘super allowance’. This means that effectively you are obtaining tax relief at 25%.
On the face of things, it may seem logical to accelerate tax relief forward until 31 March 2023 to make the most of the additional allowance.
But if your company is going to pay tax at the marginal rate, then it may be beneficial to consider delaying the expenditure until after 31 March 2023, as you could then save corporation tax at 26.5%.
There were initially plans to reduce the Annual Investment Allowance from £1m down to £200,000 from 1 April 2023; however, this was scrapped in the Chancellor’s Autumn Statement.
6 Rewarding your employees
If your private practice employs staff, whether this is a secretary, personal assistant or a family member, you may consider rewarding the employees. These would be tax-deductible, which helps save tax for you.
Certain rewards are not subject to tax implications for your employees. This would include staff entertaining and trivial benefits such as small gifts. But there are limits to the amounts you can spend in order for them to be exempt from tax.
Bonuses and pay rises would be subject to the usual tax and national insurance deductions.
You may also wish to consider making an additional pension contribution on behalf of your employee. This is likely to be exempt from tax for them, but you or your company will be able to claim tax relief on the payment.
7 Review your pricing structures
Inflation rates are currently higher than they have been for many years. The insurance market forms a substantial part of the private medical sector and they have tariff rates for procedures. It is difficult to negotiate these.
However, with high waiting lists within the NHS, many Independent Practitioner Today readers are seeing self-paying patients. The self-pay market usually has higher rates and pricing is set by you. With this is mind, you should review the fees you charge to ensure you are at least keeping up pace with inflation.
It may be tempting to discuss pricing with colleagues – however, you should be very careful if
you do so. The watchdog, the Competition and Markets Authority (CMA), has been interested in the medical sector for some time and has punished businesses where it believes uncompetitive practices have been taking place.
8 Crystalise capital gains
Many companies now hold investment portfolios as a way of keeping funds retained in the companies in line with inflation.
If you have a large portfolio, it may be worth discussing selling your investment portfolio and repurchasing prior to 31 March 2023 in order to ensure the gains are taxed at 19% rather than likely paying corporation tax at 25%.
Such decisions should be discussed with both your independent financial adviser or portfolio manager, and an accountant, as it may be necessary to take certain steps to ensure this is taxed correctly.
9 Salary sacrifice schemes
Electric cars have been very popular over the last few years, particularly since the benefit-in-kind rates on them have been low.
Many doctors will have chosen to make use of the NHS fleet scheme to obtain tax and superannuation relief on the lease payment of an electric car.
As the deduction is made against your pensionable pay, the commencement and cessation of using the NHS fleet scheme has an impact on your pension growth for tax purposes.
When you cease to use the scheme, this can cause a significant increase in growth leading to tax charges, particularly if you have been part of the 1995/2008 pension scheme.
HM Revenue and Customs (HMRC) allows for inflationary increases to your pension pot which is based on the Consumer Price Index (CPI).
There are ongoing consultations taking place surrounding the CPI rates used. The outcomes of the consultations may give rise to planning in respect of the return of an NHS fleet scheme vehicle.
10 Pension savings annual allowance
Many doctors have received the dreaded brown envelopes from NHS Pensions this year showing their growth figures for 2021-22.
If you have not already done so, you should ensure this has been reviewed by a specialist medical accountant to see that you do not have any hidden tax liabilities in relation to your pension savings.
It may be that if you have growth in excess of £40,000, then an amended tax return needs to be submitted on your behalf.
The date for 2020-21 ‘scheme pays’ election applications closes on 31 March 2023. You should ensure that if you have opted for a ‘scheme pays’ election for this year, then this has been accepted by NHS Pensions.
You can request confirmation that the election from NHS Pensions has been accepted. Applications made after 31 March 2023 may not be accepted.
The next few months are likely to be extremely busy for doctors, but making time to ensure you are ready for the next tax year could save you a significant amount of tax.
Written for the Independent Practitioner Today, February Issue.
