Wondering how to reduce your tax burden as a GP? That’s only natural, both for your business’s sake and your personal circumstances.
Saving money on your taxes isn’t as complicated or difficult as you may think. Keep reading this blog post for our top five tips on how to reduce your tax burden.
Claim your allowable expenses
As a GP, if you save money in your business, that’s money that you can either reinvest to grow the practice or put aside for your own benefit. This is, therefore, a great place to start.
The main way to reduce your tax burden as a business owner is to claim for every business expense you can. By including them in your tax return, the expenses will be subtracted from your pre-tax profit. That reduces the figure HMRC uses to work out your taxes, ultimately lowering your tax bill.
However, for a business expense to be ‘allowable’ and therefore deductible, it must be incurred “wholly and exclusively” for business purposes.
Allowable expenses for doctors and GPs can include use of a home office, a mobile phone, broadband, insurance, professional memberships and subscriptions, training courses, conferences, work-related books and magazines, and equipment.
Business structures and tax
You should also evaluate your business structure to make your practice as tax efficient as possible. Limited companies pay an effective corporation tax rate of between 19% and 25%, depending on profit levels.
Sole traders, on the other hand, can face taxes of up to 45% on some of their income — but they do benefit from the £12,570 tax-free personal allowance.
But what does that mean for you?
Generally speaking, it means that, if you’re a sole trader, you might benefit from incorporating your business and becoming a company if you make a lot of money. However, this will come with additional costs and administrative work, so always seek advice.
Conversely, if you’re operating under a limited company but have modest profits, you might benefit from disincorporation so you can enjoy the benefits of a tax-free allowance.
Now let’s move on to personal savings.
Did you know you can potentially reduce your tax bill by making pension contributions through the net pay method — although this is only available to employees.
Here’s how it works:
- your employer deducts the full amount of your pension contribution from your pay before any tax is deducted (you won’t pay tax on your contribution)
- you then pay tax on your earnings minus your pension contribution — as a result, your tax bill will usually be lower.
If you’re self-employed, you can claim tax relief through relief at source. Through this method, when you pay into your pension, your scheme administrator claims basic-rate tax relief from HMRC and adds it to your pension pot. If you pay tax above the basic rate, you can claim the additional relief through a tax return or by contacting HMRC.
The amount of money the Government gives matches the highest income tax bracket you’re in; therefore, higher rate taxpayers stand to gain in particular.
Tax and capital gains
If you sell an asset and make a profit, either as part of your business or personal affairs, you may have to pay capital gains tax (CGT).
CGT is charged at 10% (18% for property) if you’re a basic-rate taxpayer and your gain does not push your total income for the tax year into the additional tax band. Additional and higher-rate taxpayers pay 20% (28% for property).
To reduce your CGT bill, make sure to:
- Use your CGT allowance. Every tax year, you have a tax-free allowance, so make sure you use it to reduce your tax bill — it’s a case of ‘use it or lose it’. As of April 2023, the allowance is £6,000. However, that will decrease to £3,000 in April 2024, so you may want to bring forward an asset sale if you have one planned.
- Give money or assets to your spouse. If you’re married or in a civil partnership you can transfer an asset to your partner without it being taxed — as long as it is a permanent gift.
- Use your ISA allowance. Investments you hold in an ISA are sheltered from income tax and CGT.
Give to charity
Gift aid is a scheme that lets charities claim additional funds from HMRC with every donation they make. But if you’re an additional or higher-rate taxpayer making donations, you can benefit via the gift aid scheme, too.
Simply put, when you give a donation, you can claim the difference between the rate of tax you pay and the basic rate on your donation through your self-assessment tax return.
As an example: you donate £100 to a charity. It claims gift aid to make your donation £125. You pay 40% income tax, so you can personally claim back £25 (because £125 x 20% is £25, 20% being the difference between the additional and basic rate of tax).
Admittedly, this is a suggestion in which you will only save money if you’re already giving to charity. But if you do already make donations, simply claiming gift aid relief could be extremely beneficial to you.