When the income of self-employed dentists and employed dentists surpasses £100,000, they find themselves subject to a marginal tax rate of 60% and 63% in Scotland. This occurs because their tax-free personal allowance starts to diminish, resulting in a 50% increase in their tax rates. This increase can be offset by making a pension contribution.
Dentists who run their own company are impacted by this as well. Although the basic idea remains unchanged, I believe this primarily impacts dentists who are self-employed or employed by someone else. Managing the dividends you receive and finding ways to avoid this tax rate becomes easier when you have a company.
Example – Dentists can avoid 60% tax rates by making pension contributions
Darren anticipates a profit exceeding £100,000. Following his accountant’s recommendation before the tax year ends on 5th April, he pays £10,000 to his pension. As a result, his pension fund receives a supplementary 25% top-up payment of £2,500 from HMRC, thereby increasing Darren’s overall gross contribution to his pension fund to £12,500.
Darren’s self-employment profits amount to £110,000 after his accountant completes the accounts. He can deduct a GROSS pension contribution of £12,500 from these profits. As a result, Darren’s taxable NET income is adjusted to £97,500.
Darren benefits from this in several ways.
- His pension is now funded with a top-up payment from HMRC of £2,500.
- He avoids paying 60% or 63% in Scotland tax on £10,000 of his income.
- His next income tax bill is reduced by £4,660 or £5,000 in Scotland for the tax relief on the pension contribution.
- His NET income is now under the £100,000 threshold for applying for tax-free childcare top-up and free childcare in England. Please note that the free childcare schemes in Scotland, Wales and Northern Ireland differ from those in England.
Summary of tax saving benefits for Dentists
- Dentists affected by the 60% income tax rate should consider paying into a pension.
- Paying into a pension reduces the total income tax paid.
- It can provide opportunities for free and top-up funding for childcare by adjusting your net income to be under £100,000
