There were some big surprises in the chancellor’s Spring Budget. Lucas Salt, from independent financial advisers Wealthwide, sets out how the proposed changes will impact dentists.
Pensions
In the commons on Wednesday, Jeremy Hunt announced two major reforms to the pension tax system which will significantly benefit dentists. The chancellor said he would abolish the lifetime allowance for pensions, which is likely to save many dentists thousands of pounds of tax in retirement. He also increased the annual pension allowance from £40,000 to £60,000 from April 6, 2023.
The annual allowance is the amount that can be paid into a pension scheme every year, and contributions receive tax relief. Exceeding this allowance means any tax relief is repaid to HMRC via an annual allowance charge. Many dentists want to pay more into their pensions than the current £40,000 limit allows and have paid annual allowance charges due to high NHS pension growth in the tax year.
As a result, we’ve had a situation where many dentists opt out of the NHS Pension for a period of time, and then return to the scheme in order to manage their pension tax position. This is sometimes referred to as “doing the hokey cokey”. With the increase of the annual allowance to £60,000 from April 2023, dentists will be able to remain in the scheme and continue to accrue valuable benefits without penal tax charges.
Those contributing to the NHS pension who have pension input amounts of more than £60,000 will benefit from tax savings of £8,000 to £9,000 a year.
Another change is that the minimum annual allowance has increased from £4,000 to £10,000, which for many high earners will be a tax saving of £2,700 every year.
This also means that dentists can earn up to £360,000 before their allowance is tapered to £10,000 (previously, dentists earning £312,000 only had an allowance of £4,000 a year).
The devil, of course, is in the detail – despite the lifetime allowance being abolished, the Pension Commencement Lump Sum (the tax-free element of any pension) has been set at 25 per cent of the current LTA – which is £268,275.
This suggests that any dentists who already have a protected right to take a higher PCLS will continue to be able to do so and should therefore retain their fixed or individual protection. We may have to wait for legislation in the finance bill to get the fine details on this.
Dental businesses and self-employed
Dentists who operate through a limited company may pay a higher amount of corporation tax from April 2023:
- on profits of £0 - £50,000, the rate is 19 per cent;
- on profits of £50,001 - £250,000, a marginal rate of 26.5 per cent applies
- on profits of over £250,000, the rate is 25 per cent
A limited company may be able to offset some of this extra tax by the new ‘full expensing’ allowance announced in the budget. Businesses will be able to deduct 100 per cent of all plant and machinery investment spending immediately when calculating taxable profits. This increased generosity of capital allowances will likely boost business investment in the short run.
Both directors and self-employed dentists’ personal taxation is also changing as the Additional Rate Threshold will reduce from £150,000 to £125,140. Income above this amount is taxed at 45 per cent and 33.75 per cent, for personal tax and dividends, respectively.
The pension changes allow more to be contributed each year, which reduces personal taxable income, and a limited company can make employer pension contributions, which are an allowable expense when calculating profits and the corporation tax owed.
It is recommended that practices discuss how to best maximise these changes with their financial advisers and accountants.
Childcare
The changes will reduce childcare costs for dentists that are existing and prospective parents.
The current system in England offers 30 hours of funded childcare to parents of three and four-year-olds who work the equivalent of 16 hours per week on at least the National Minimum Wage and have taxable income of less than £100,000. Again, pension contributions are a way of reducing taxable income and keeping income below £100,000 also allows the full personal allowance (zero per cent tax) to be retained.
The system will be expanded to cover the lower age group and the reforms, which will match the eligibility of the current three and four-year-old offer, will be introduced in stages with all parents of children under five able to access 30 hours of funded childcare from September 2025.
This means eligible parents of children in England aged nine months to school age will get between 15 and 30 hours a week of funded childcare from the moment maternity or paternity leave ends. This will mainly help parents with children aged one or under now.
In the long-term, the people who will benefit most are eligible parents of children who are born from December 2024 onwards. Initially, children aged two will have access to 15 hours of free childcare from April 2024, followed by children aged nine months from September 2024. All children under school age will have access to the expanded 30 hours of free childcare from September 2025.