Little known tax-traps

“I’m paying how much in tax!?”

This is not an uncommon phrase when clients are made aware of the true amount of tax they are paying. Most of us receive our income, whether via salary, profit-share from our practice, or a combination of both, without too much thought as to the amount of tax paid. Understandably, our attention goes straight to the net figure, the bottom line that pays the bills and buys the bubbly.

However, it tends to turn a few heads when people discover they have been paying an effective income tax rate of 61%. Yes, that was 61% – it wasn’t a typo.

How could we possibly pay that amount of tax?

Well the problem exists for those drawing more than £100,000 in income. For every £2 one earns over £100,000, we lose £1 of our personal allowance. This results in a 41% higher tax rate and the loss of the tax-free allowance, which combines to create an effective 61% for income tax. Ouch. And that’s not accounting for any National Insurance Contributions, which would add another 2%.

The 61% tax band exists on a band of earnings between £100,000 and £125,000.

Thankfully, there are some solutions to this problem. Dentists can make use of salary sacrifice to lower their income and boost pension provision. Pensions, particularly after the changes in 2015, are one of the most flexible vehicles available to Dentists, especially when the practice can contribute on their behalf (which as an added bonus will lower the amount of Corporation Tax payable). Another idea could be to consider tax-efficient investments, such as ISAs or the lesser-known Enterprise Investment Scheme (EIS).

The old saying that the only two certainties in life are death and taxes still holds water, but this should not stop us making the most of the allowances available.