Ross Martin, director at Hive Business, explains a sneaky new rule by HMRC that’s going to affect dentists more than most when it comes into effect in April.
Ross, what’s happened?
There’s an effective five per cent increase on dividend tax. This means almost everyone who has shares in a limited company will be impacted. The minimum increase is going to be £2,000 per annum, but it will in many cases be five per cent of your income. If you’re a limited company owner earning £200,000 your tax will increase by £10,000.
How does this affect dentists?
It hurts dentists more because they tend to earn between £100,000 and £400,000 where they’re caught between the tax burden but are probably not aware of more sophisticated solutions. If they’ve chosen to operate through a limited company – which is a good idea and most of them should – this is resulting in a tax burden of 45 per cent instead of 40 per cent.
So what are their options?
Good question. Firstly they’ve got to realise they’re going to suffer this immanently – it’s coming into effect in April. So many people just don’t know. Some people have a director’s loan account that means they won’t have to suffer that tax yet. But other than that it’s kicking in if you take dividends.
This is really about accepting a compromise – you can avoid the tax by leaving the money in the business but then you’re paying an opportunity cost. You may choose to use the money to get your company to buy property or other assets, but that stores up likely tax consequences for the future that are worse. Some people might choose to redirect the money from dividends into pension contributions. Obviously you can’t spend it immediately if you do that, and there’s a limit on how much you can redirect.
It’s normal human nature to want the maximum – to want the money to spend but not the tax consequences, and that’s where our wide range of solutions kick in. With clients we start with a conversation about the issue – like flagging this rise in dividend tax – and begin fact finding with them. What level of profits are they earning? What are their goals? What compromises are they comfortable with?
Are dentists getting bad advice?
They’re generally with accountants they’ve been with a while who tend to operate exactly like they did 10 years ago. It’s a bit like taking your SEO advice from a guy who hasn’t kept up-to-date with Google’s algorithms – and it’s quite poor form from our profession. I think people should be encouraged to engage with their accountant and receive proactive advice.
Ross is hosting a tax conference for dentists in Birmingham in April 2016. Tickets and refreshments are free – please contact us on01872 300232 or email us at hello@hivebusiness.co.uk.
