Tax issues unpicked: part one – foundation dentists
Shoaib Khan explores and unpicks the tax issues that foundation dentists will face during their training year.
As a nation, on average, we waste £421 per taxpayer by not taking advantage of available tax reliefs (according to www.unbiased.co.uk). Dentists are no different in this respect.
Dentists are blessed in that most will enjoy the flexibility available in how they operate their trade from a tax perspective. The tax issues will be different at the various stages of a dentist’s career. Associate dentists working in practice are generally classed as self-employed. This allows them to operate as a sole trader (and competing personal tax returns) or via a company (completing corporation tax returns and personal tax return on income they take from the company).
In a lot of cases, a dentist will be business owners when they purchase a dental practice. Therefore, in addition to personal and company tax affairs, they also have to manage staff tax affairs (payroll). Specialist dentists working in dental hospitals are likely to be employed. Therefore, tax issues for these individuals will also be different.
The timing and responsibility for reporting income and expenses and the payment of tax to HM Revenue and Customs (HMRC) is different if an individual is employed or self-employed, or running their trade through a company.
This ‘Tax issues unpicked’ series aims to highlight some of the tax issues at various milestones in a dentist’s career. Namely, foundation training year, becoming self-employed, buying a dental practice and selling a dental practice (usually at the time of retirement).
This article focuses on tax issues most dentists will face during their foundation training year. It is particularly relevant to those dentists who were in their foundation training last year. And those who have started their foundation training this year.
When should I pay tax and how?
As a general point, the personal tax year in the UK runs from 6 April each year. And ends on the 5 April the following year. So the 2020/21 tax year started on 6 April 2020 and will end on 5 April 2021.
According to the NHS website, the average annual 2020/21 salary for a foundation year dentist is £32,796. These dentists will be employed by their training practice. This makes the tax affairs for these individuals somewhat straightforward during the first year of foundation training.
The tax rates change on an annual basis and each individual has a ‘tax free’ amount for personal tax purposes. Again, this will change on an annual basis. The rates and allowances (decided by the government) that will apply to most foundation dentists during 20/21 tax year are as follows:
- Personal allowances: £12,500 (the amount of income before income tax is charged)
- NIC: £9,504 (the amount of income before employees’ national insurance contribution is charged)
- Income Tax rate: 20%
- National Insurance rates: 12%.
As an employee, the foundation year dentists will receive income that has already been taxed by their employer, who will run monthly payroll. The monthly salary is calculated by taking your annual income minus your personal tax allowances, student loan and pension contribution.
This amount is then divided by 12 months and taxed at the appropriate rate. The amount after tax is paid via a monthly salary. Whilst you are employed, your employer is responsible for taxing your income.
They will be provided a tax code by HMRC (which provides the rates of tax your employer should apply to your income). On that basis, your employer is also responsible for paying tax over to HMRC. You’re free to do with your income as you wish.
Additional tax deductions may be available
Although tax is paid via payroll, you are likely to attend professional courses in areas of interest to you. For example, you may wish to specialise as an orthodontist and attend available courses and pay for them yourself. You may subscribe to professional magazines to keep up with professional developments.
In most cases these expenses will not be reimbursed by your employer if they do not relate to your foundation year training. You can claim a tax deduction for these expenses by completing a personal tax return. Examples of some common tax deductible expenses are below:
- Professional subscriptions (for example GDC membership fees, BDA membership fees)
- Magazines and books (dental publications such as Dentistry)
- Accountancy fees (for example, fees for preparation of tax returns)
- Courses (which you cannot claim back from your employer but are related to your profession)
- Travel expenses (incurred to attend courses/training, not to your main place of work).
Generally, in your foundation year, any expenses incurred as part of your formal training that are incurred by your employing practice or refunded to you by your employer, cannot then be claimed as a further deduction on your tax return.
Completing a tax return
The tax returns are always a year behind (as you cannot complete a tax return for an ongoing tax year). So, the next tax return due is for 2019/20 tax year. This started on 6 April 2019 and ended on 5 April 2020.
So those dentists who started their foundation year training after 6 April 2019 should be able to claim additional deduction by completing a personal tax return.
The deadline for completing an electronic personal tax return for in respect of 2019/20 tax year is 31 January 2021. You must register yourself with HMRC (https://www.gov.uk/government/publications/self-assessment-register-for-self-assessment-and-get-a-tax-return-sa1). They will provide you with a unique tax reference number (UTR – essentially the tax equivalent of your national insurance number).
If you wish you can complete a tax return yourself through HMRC’s website. However, it is the author’s opinion that you should use a professional tax adviser to ensure that a correct tax return is submitted to HMRC (you might argue I’m biased, but my point is still valid).
Note: HMRC is running behind with its admin due to the pandemic. So if you believe you will need to complete a tax return for 2019/20 tax year, you should register yourself with HMRC as soon as possible to prevent any delays.
The focus of this article has been on additional expenses that may be claimed. However, if you have received other income in addition to your employment income, this should also be reported in a tax return as you may owe HMRC additional tax. This is outside the scope of this article and professional tax advice should be sought in this applies to you.
Whilst your tax affairs are likely to be fairly straightforward, it is always useful to get in the habit of keeping a record of income and expenses. This is for all taxpayers, not just dentists. This will serve you well in the near future when your tax affairs become more complicated.
It is likely that when your earnings will increase, you may have multiple sources of income (for example, a mix of NHS and private dentistry).
You may invest in other assets (such as investment properties). Therefore, you will be required to report the relevant income and expenses, and have the records available to support your return.
More importantly, if you submit a personal tax return, HMRC requires you to keep records of your income and expenses for at least five years after the 31 January submission deadline of the relevant tax year. Whilst you are not required to submit supporting documents with your tax returns, HMRC may enquire into your tax return to make sure you’re paying the right amount of tax and ask for supporting documents.
If these are not available, HMRC may apply fines and penalties.
In my experience, this is an area where many taxpayers are often lagging behind. This can lead to missed expenses and, by extension, overpaying tax. As a result, good record keeping isn’t just required by HMRC. It can also help to ensure that appropriate income is reported. Expenses are deducted and the correct amount of tax is paid.
Next in the series
In the next article in the series, we will review the tax issues for a dentist once they become an associate dentist. It is the most popular question I get asked by dentists: should I set up a company or remain self-employed?
Shoaib is an experienced tax advisor, specialising in advising owner-managed businesses. He has many years of advising dentists in relation to their tax affairs.