Tax efficiency is a critical aspect of financial management for any business, including dentists and orthodontists, allowing them to retain more of their earnings while ensuring compliance with relevant tax laws.
In this guide, we’ll delve into strategies that dentists and orthodontists can employ to optimise their tax situation.
Understand your business structure
A good first step in maximising tax efficiency as a dentist is to ensure your business assists and does not hinder your tax efficiency. The most common business structures are sole traders and limited companies, and each has different tax implications:
- Sole traders pay income tax: The tax-free personal allowance means they don’t have to pay tax on a large chunk of profits. However, the additional and higher rates of income tax (currently 40% and 45%) can result in a high tax bill when profits are high.
- Limited companies pay corporation tax: This is charged at 19% on profits of £50,000 or below and 25% on profits of £250,000 or above. Profits between these figures are charged at 25%, but companies can claim marginal relief.
What does this mean for you? Broadly speaking, it means that businesses making higher profits than others might benefit from running as a company, and vice versa. However, running a company can come with increased costs and obligations, so speak with a financial adviser to make sure it’s the right choice for you.
Company directors: dividends
If you’re a dentist business practising as a limited company, did you know you can optimise your tax position by paying yourself a mix of salary and dividends?
A dividend is a distribution of earnings by a company to its shareholders. Seeing how they are taxed at a more generous rate than regular tax (see table below), it will usually be in your interest to prioritise dividends rather than a salary.
Tax Band Income Tax Dividend Tax
Basic 20% 8.75%
Additional 40% 33.75%
Higher 45% 39.35%
Make sure that you also claim your dividend tax allowance, which is currently valued at £500.
Leveraging allowable expenses
Dentists and orthodontists can take advantage of a range of allowable expenses to reduce their taxable income – as long as they are made for business purposes. These include costs related to:
- Overheads: Rent, utilities, and insurance for your premises
- Medical supplies: Dental instruments and orthodontic materials
- Staff costs: Salaries, National Insurance contributions, and pension contributions for your employees
- Professional development: Costs associated with professional education, training courses, and conferences
- Travel expenses: Business travel and accommodation related to professional activities.
Maintaining accurate and detailed records of these expenses is essential to substantiate your claims in your self-assessment tax return.
Capital allowances
Dentists and orthodontists can claim capital allowances on qualifying capital expenditures. The difference between a capital expense and a business expense is that while business expenses are day-to-day expenses, capital purchases are assets that have a useful life of longer than one year.
The Annual Investment Allowance (AIA) allows you to deduct the full value of qualifying assets from your profits, such as dental equipment, office furniture, and different types of technology. Maximising these allowances can significantly reduce your tax liability.
Research and development tax relief
Various tax reliefs are available to dentists, including research and development (R&D) tax relief, which rewards businesses that discover innovative approaches to business.
This is a woefully under-claimed tax relief in dentistry, so if you need extra help figuring out how to make a claim, reach out to us, and we’ll see what we can do to help.
Are you a dentist who needs help with your tax strategy?
Get in touch with us; we’ll help you develop a tax plan that works for your business.