Why should doctors do tax planning?
As a doctor, likely to be making a decent living, you’re likely to be hit by more taxes than the average worker.
Taxes can be frustrating, getting in the way of providing more for yourself and your family.
But with careful tax planning, you can minimise your tax bill to take home what you deserve.
Expenses for doctors
As a self-employed GP or private practitioner, you have the opportunity to reduce your tax bill by deducting allowable expenses before calculating your trading profit.
An allowable expense is any business expense you purchase “wholly and exclusively for the purposes of the trade, profession or vocation”, to quote HMRC.
It’s difficult to give a succinct list of allowable expenses doctors and GPs can claim, but you’ll usually be safe to claim tax relief on things like:
- membership fees for the BMA, GMC or similar
- specialist medical equipment
- postage, stationary and office supplies
- subscriptions to professional journals.
You might notice training courses aren’t on the list. The reason why has been controversial over the years.
HMRC’s views professional development as something that’s more about you and your long-term career in the medical profession, than about fulfilling your current role. On those grounds, training courses tend to fail the “wholly and exclusively” test.
Another expense missing from the list is travel and subsistence, which are incredibly important for a travelling professional. HMRC doesn’t consider anybody’s commute to their usual place of work to be a business expense. The same is true for “regular meals”.
What you can claim for
But if you have to travel to see a particular patient at their home and haven’t had the time to prepare a meal at home, you may be able to deduct the cost for fuel, food and maybe even accommodation from your taxable profit.
When it comes to fuel, doctors who use their own cars to travel for work can claim tax relief on the basis of mileage, as long as they aren’t reimbursed through an employer or trust.
Estate planning for doctors
While you might not believe you need to think about it, or might not want to right now, estate planning is essential so you can shield the wealth and assets you pass on from inheritance tax (IHT).
IHT is charged at a rate of 40% on the estate of someone who has died that is valued above £325,000. The value of your estate below that is free of tax.
If you’re passing on a family home to direct descendants, such as your children or grandchildren, the residence nil-rate band may apply on top. It currently stands at £175,000, effectively increasing the amount you can pass on tax-free to £500,000.
Partners can inherit any unused threshold, meaning the surviving spouse or civil partner can pass on as much as £1 million free of tax.
If it looks like your estate will still be subject to IHT, you can avoid a charge on the assets or money you want to pass on by giving them away as gifts during your lifetime.
The caveat is that there may be a charge on any gifts given during the last seven years of your life. To avoid one therefore requires planning, although this can be very difficult to gauge and cynical to think about.
Additionally, you must not benefit from the gift in any way, so if you give your home to a child of yours but continue living there for free or with a subsidised rate of rent, the home will not be considered a gift for tax purposes.
Making sure your estate and practice is as tax-efficient as possible is all well and good, but what can you do to make sure you take home as much of your income as possible?
If you’re a locum doctor operating as the director of your own limited company, it’s all about working out exactly how you’re going to extract profit from your company.
Directors typically do this by paying themselves a mix of a salary, dividends and pension contributions.
Taking out a salary might not come as a surprise, but what might be is that you should keep this payment low – we often recommend around £8,840.
We say this for two reasons. First, if this is within your income tax allowance you won’t pay income tax on it.
Second, £8,840 is the secondary threshold of class one National Insurance contributions, so keeping it below that means you won’t have to pay employer’s National Insurance contributions.
After you take out this low wage, you can top up the rest of your payments with dividends, the first £2,000 of which are tax free.
Dividends exceeding this amount are taxed as follows:
- basic rate (up to £34,500): 7.5%
- higher rate taxpayers (up to £150,000); 32.5%
- additional rate taxpayers (over £150,000): 38.1%.
You’ll notice that each tax rate is lower than the three income tax bands, which is why dividend payments are so important if you want to properly plan your taxes.
It doesn’t stop there, however. Making pension contributions as the owner of a limited company can bring significant tax advantages, as your contributions can be treated as a business expense, and you’ll also benefit from tax relief on the amount you pay in.
Reach out to us for a personalised tax plan.