Corporation Tax Increase May Affect Dentists
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- Published: Wednesday, 17 March 2021 08:17
- Written by Chris Tapper
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An analysis of the effects of Rishi Sunak’s recent budget shows dentists may be affected by the increase in Corporation Tax.
Charles Linaker, UNW tax partner has released his thoughts on the budget and its effects on dental finances. His firm’s Dental Business Unit is headed by NASDAL technical committee member Alan Suggett.
Charles says that the new 25% rate of Corporation Tax will apply to companies with profits over £250,000.
He said “But of more significance to many dentists who operate wholly or mainly through limited companies is the simultaneous introduction (or, in fact, re-introduction) of a ‘small profits rate’ of 19% where profits are below £50,000, with a tapering calculation on profits between that figure and £250,000 which produces an effective marginal tax rate of 26.5%.”
Charles warned “Dentists who have become used to drawing most of their ‘remuneration’ from companies by way of dividends may need to revisit their overall tax calculations from 2023.”
The tax expert also had some thoughts on capital spending for dentists.
Charles said “The tax rate increase was coupled with a temporary “super deduction” of 130% on plant and equipment investment made by companies between 1 April 2021 and 31 March 2023. But that was perhaps no more than a realistic recognition that, without such a move, companies might be tempted to postpone capital spending until the new rate arrived.”
“With the super deduction being set at this level, the effective rate at which tax relief is obtained will be very close to 25% and for dentists this should apply broadly to any outlay which would currently qualify for the 100% annual investment allowance. So, a dental chair will meet the criteria, but not an electric car.”
There was also a warning about the ‘fixing’ of personal allowances and thresholds, which will effectively bring more taxpayers into paying higher rates. This was known as ‘the stealth tax’ when introduced by Gordon Brown.
“After slight increases to both the personal allowance and the higher rate threshold for 2021/22, these will then both be frozen until 2026, meaning that many junior or part-time dentists will be sucked into the 40% band and, those with children, an effectively still higher tax bracket, because any child benefit received will start to be clawed back under the High Income Child Benefit Charge (a decidedly unfriendly family measure which was introduced by George Osborne in 2013, has remained unchanged since and which still catches out unsuspecting parents).”
“Similarly, the income threshold above which one’s personal allowance starts to be clawed back remains frozen at a level of £100,000 until 2026, so that yet more existing 40% rate dentists will suffer an effective rate of 60% on any income falling between £100,000 and £125,140.’
‘Again, those dentists operating through companies have the facility to structure their taxable income so that it remains below the level of £100,000, thus preserving their personal allowance, but this option is denied to their self-employed colleagues operating through partnerships, or as principals or associates.’
Charles also warned that dentists may have to rethink their planned retirement date.
“The stealth tax measures were completed by freezing until 2026: the £150,000 limit above which the Income Tax rate becomes 45%, the Inheritance Tax exemption threshold at £325,000 (where it has remained since April 2009, when Labour’s Alistair Darling was still Chancellor) and the Lifetime Allowance for pensions of £1,073,100 (the maximum amount that a person can save in tax advantaged pension schemes before extra tax charges arise on drawing benefits).”
This last measure could cause some dentists in the NHS pension scheme to review their plans and retire earlier than they might have done otherwise, which would hardly be a welcome consequence on health and welfare policy grounds,” he said.
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