Have you sidestepped the personal allowance tax trap?

Simon Cosgrove on tax

Simon Cosgrove, specialist financial adviser at Wesleyan Financial Services, shares how some out-of-the-box financial planning can help you manage some of your tax liability on earnings.

As a dentist who works in a busy practice, every penny is hard earned. Many will look to review their earnings to ensure HMRC don’t get more than they are due.

One of the big challenges that dentists face as higher earners is their liability for tax on earnings. However, many don’t realise that a reduction in their personal allowance can become a problem over a certain income.

How the personal allowance tax trap closes

The personal allowance is the amount of income that you are allowed to earn in a tax year before you become liable to pay income tax. In tax year 2023/24, this amounts to £12,570.

However, when you reach taxable income of £100,000, your personal allowance starts to taper away. For every £2 that you earn over £100,000, you lose £1 of your personal allowance.

This means that anyone earning over £125,140 in this tax year will have no personal allowance. All of their earned income will be taxable. In the financial world, this is sometimes referred to as the ‘60% tax trap’.

In real terms, an example would be a dentist who earns £100,000 in one year and then earns £110,000 the following year. Not only will the additional £10,000 be taxed at 40% as normal, leaving them with £6,000 net, but they also lose £5,000 from their personal allowance.

That means that there is an additional £5,000 in taxable income. This will also be taxed at 40%, costing them another £2,000 in income tax. When personal allowance loss and income tax liability are combined, that £10,000 increase in pay has been taxed by £6,000. The monetary impact obviously worsens the more you earn over £100,000.

How can a dentist mitigate tax liability?

Fortunately, there are a few options to explore for dentists in this position.

A dentist who is the director of a limited company has the option to keep the remainder of their earnings in their limited company. This avoids getting paid out and taxed at the higher income tax rate in addition to losing their personal allowance. It also provides the opportunity to explore commercial investments.

Money from your limited company that sits in a business bank account is at the mercy of inflation risk. The purchasing power of the fund is eroded over time due to high inflation rates and interest rates failing to keep pace.

Investing offers the potential to get higher returns on your money than you would from interest in a savings account. This is when approached with a long-term view of five years or more. This gives investments the opportunity to ride out any potential dips in the market.

In addition, you may be in a position to delay accessing the investment fund until you are potentially paying a lower rate of tax in retirement. Some investment charges can also be claimed against tax in your accounts too. However, the value of investments can go down and you may get back less than you invest.


To manage investment risk, the golden rule is not to put all your eggs in one basket or ‘investment asset class’. This principle is known as ‘diversification’.

A common way for prospective investors to achieve diversification is to pool their money with that of other investors and invest in a multi-asset collective investment (or ‘fund’). Seeking expert advice can help you understand more about asset classes, funds and your own appetite for investment risk.

Another way of regaining a lost personal allowance is by looking at the potential for further pension contributions. Making a pension contribution lowers your taxable income. As a result, it can help to regain some or all of your personal allowance, depending on the contribution. A pension contribution that lowers your taxable income below £100,000 would mean that you completely regain your personal allowance.

There’s been a significant shake-up in pensions this year after the abolishment of the lifetime allowance. But there’s also the annual allowance increase that you may be able to take advantage of. As long as you aren’t at risk of breaching the overall £60,000 threshold that you are able to save tax-free. This is where exploring personal pensions can help.

The added benefit of both a commercial investment and a pension contribution is you are also saving for your future. This could give you the flexibility to retire at the right time, as well as regaining your personal allowance.

Seek advice from specialists

Options that require moving part of your earnings into a long-term savings or investments strategy need to be balanced with what you want or need to maintain your standard of living.

But if you can maintain your standard of living by earning less than £100,000, speaking to a specialist financial adviser could help you mitigate tax liability and look at ways you can grow your hard-earned money.

You can speak to a specialist financial adviser at Wesleyan Financial Services as part of a no-obligation financial review by visiting wesleyan.co.uk/dental or calling 0800 316 3784.

Please note: Tax treatment depends on individual circumstances and may be subject to change in future.

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