Everyone knows that pension contributions attract tax relief, despite the pension taper for high earners. Broadly, for dentists there are three types of pension contributions, depending on the type of work you do and your personal circumstances, and the tax implications of each are slightly different.

These are:

• The NHS superannuation scheme
• A personal pension scheme
• A company-operated pension scheme

NHS Pension (superannuation)

With the NHS Pension your employee contributions are deducted from your pay before you receive it. If you are a practice owner this is done through the monthly NHS remittance and if you are an associate this is done by the practice owner when they calculate your monthly pay. There is no tax relief at source for these pension contributions. This means that they need to be entered separately on your personal tax return and they will appear as ‘payments into a retirement annuity contract’ on your tax calculation, so that they are deducted in arriving at your taxable income figure.

Personal pension scheme

With a personal pension, if you make a contribution of, say, £80, the Government will gross this up to a contribution of £100 to allow for basic rate tax relief. These grossed up contributions are also entered separately on your personal tax return. However, rather than being deducted in arriving at taxable income like superannuation, they will appear as an increase in your personal allowance on your tax calculation . This is because basic rate tax relief has already been applied at source (i.e. when the payment was made). The extension of your personal allowance means that you obtain tax relief at the higher rate if appropriate.

Company-operated pension scheme

A company can make pension contributions to a company-operated scheme for its employees. With company pension scheme contributions there is no Government grossing up, so the company will need to pay £100 into the scheme to achieve the same level of contribution as in the previous example. However, this payment is deductible for corporation tax purposes, attracting a tax saving of between 19% and 25%. Contributions made to a company-operated scheme do not appear on your personal pension contribution.

Who can make which type of contribution?

If you are a sole trader, you can make personal pension contributions in addition to the NHS superannuation contributions. This will save you tax at the highest rate that you pay.

If you trade through a company, in addition to the NHS superannuation contributions, you can either make personal contributions to a personal pension scheme or your company can make contributions to a company-operated pension scheme. Income is drawn from a company in the form of dividends and/or salary. For 2024/25, the first £500 of dividend income is tax free, thereafter dividends are taxed at 8.75% up to the basic rate band and then at 33.75%. Salary will generally be taxed at 20% up to the basic rate band and 40% after. Therefore, in order to make a tax saving of 20%, the income you make a personal pension payment from will already have been taxed at least 8.75%. This represents a net tax saving of 11.25%. Therefore there is a greater tax saving from making company pension scheme contributions when considering personal tax and corporation tax together, than when keeping a pension scheme as a personal one.

This blog is viewing the contributions purely from a tax perspective – advice should always be taken from an Independent Financial Adviser when looking into these options.

If you would like more information on this, or how to go about finding out which is right for you, please get in touch.