Simon Cosgrove, dental regional manager at Wesleyan Financial Services, shares some key talking points to discuss with your financial adviser.
Now that the dust has settled on the first budget announcement delivered by our new government and chancellor of the exchequer, let’s examine some financial planning options in relation to some of these changes.
Firstly, it’s important to know that every dentist’s financial situation is different, resulting in evolving approaches to financial planning, and as such, should be reviewed and considered on an individual basis. However, here are some points to discuss with your financial adviser in relation to the announcements…
Personal financial planning
Pensions to become subject to Inheritance Tax (IHT)
With retirement planning consistently being a top financial priority among our dental clients, it would be prudent to address this announcement first.
The first point to make is that the primary objective of a pension is to provide capital and income for retirement in an extremely tax-efficient manner, and this rule change does not alter this. What it does change is considerations for bequeathing any unused funds on your passing.
It is also important to remember that this change is not planned to be implemented until April 2027. This means that you have time to reflect and review your financial position.
It’s advisable not to make any knee-jerk reactions and crystallise pensions as a direct response to the budget, as there will be plenty of time to revise any plans (if necessary) before the changes take place. The pension changes aren’t included in the 2024/25 Finance Bill and are subject to further consultation (with responses due by 22 January 2025) and a future Finance Bill.
Future planning
Should these changes be passed, a future conversation may need to be had about who your named pension beneficiary is. It may well be the case that the named beneficiary of the pension should be your spouse rather than your children, as Inheritance Tax tends to be paid on the second death so passing it to your spouse could allow more flexibility and additional planning.
Remember that most of the income that you take from your pension fund will be subject to income tax. If you are, or become, a higher-rate taxpayer as a result of accessing pension benefits, the pension will be taxed at your highest marginal rate.
This area is something that you may benefit from taking advice on in the future to see whether it’s worth accessing your pension and paying income tax on it now rather than Inheritance Tax in the future. It’s a complex area, but despite common misconceptions, there’s no rush to take action as the implementation of this rule is still subject to consultation and may be altered.
Income tax brackets frozen until 2028
This essentially means more dentists may fall into higher income tax brackets as their incomes change.
Regardless of whether you are projected to face this issue in the future or not, it may be advisable to look at ways of reducing your taxable income. One way to do this is to look at pension contributions (with the current annual tax limit being £60,000).
Pension contributions have benefits both now and in the future. As well as the benefit of saving for your retirement, the tax relief associated with pension contributions is extremely attractive to reduce taxable income now.
By utilising pension contributions, additional rate taxpayers may potentially be able to drop down into the 40% bracket again or begin regaining their Personal Allowance if it has been lost due to earning more than £100,000 per annum.
Pension funds grow free of Income Tax and Capital Gains Tax, as do ISAs (with their separate tax limit of £20,000 per annum). It’s also easily forgotten that there is a separate Junior ISA allowance of £9,000 per annum.
The best strategy is to organise your tax allowances well ahead of the end of the tax year in April 2025 as ISA allowances renew annually and existing allowances cannot be carried over. It’s a case of use it or lose it. However, there can be an option to carry forward unused pension contributions.
Business planning
Employer National Insurance contribution hikes
Starting 6 April 2025, the standard rate of employer National Insurance (NI) contributions will rise by 1.2 percentage points, reaching 15%. Additionally, the threshold for employers to begin paying NI on salaries will decrease from £9,100 per annum to £5,000. This adjustment will result in a larger portion of employees’ earnings becoming liable for NI contributions. However, the Employers Allowance will be extended – the amount employers can claim back from their National Insurance bill – from £5,000 to £10,500.
If you have concerns regarding the impact of National Insurance increases on your practice, the initial step is to accurately assess the anticipated costs for the upcoming years, projecting as far ahead as possible.
This will provide you with a clearer understanding of how you may need to adjust your existing investment plans for the practice and the overall effect on your take-home pay as a practice owner.
Should you find yourself earning less, it may be beneficial to consult a financial adviser to explore how this situation impacts your broader financial objectives, including your retirement savings strategy.
Adapting your business plans in relation to these changes comes with its own tax and pension considerations that require careful evaluation. Taking steps without a thorough understanding of the potential repercussions can exacerbate an already challenging situation.
Access specialist financial advice
Speak to a specialist financial adviser at Wesleyan Financial Services as part of an initial discussion and start getting your financial planning on track for a brighter future.
Book by visiting wesleyan.co.uk/dentists or by calling 0808 149 9416.
Charges may apply. You will not be charged until you have agreed the services you require and the associated costs.
Tax treatment depends on your individual circumstances and may be subject to change in future. Inheritance Tax planning is not regulated by the Financial Conduct Authority (FCA).
This article is sponsored by Wesleyan Financial Services.
