If you’re a salaried doctor employed by the NHS, your will be in receipt of your income through PAYE (Pay as You Earn) and will not have to submit a self-assessment tax return.
However, this is not the case for healthcare professionals and doctors who are classed as ‘high earners’, those who are receipt of earnings above £100,00 per annum.
If this is your professional situation, you will need to be aware of some benefits you may lose that you would have otherwise been entitled to.
This is where an accountant such as Blue Rocket Accounting can help. We would be able to make you aware of the pitfalls of being a high earner but also help you with your overall tax planning strategy enabling you to keep more of your hard-earned money.
We know your time is precious, therefore our team of expert certified accountants can make sure your tax affairs are in order, your obligations met and your take home income maximised.
Let’s run through a few of the key areas you will need to take into consideration when you become a high earning healthcare professional.
Most UK individuals are entitled to a tax-free personal allowance, which as of the 2022/23 tax year stands at£12,570. However, if you are a high earner there is an exception to the Personal allowance. At this stage, every £2 you earn above this decreases your personal allowance by £1. This is a very important income tax rule to be aware of for doctors. At this stage, you’ll also need to do a Self-Assessment tax return.
Those earning above £125,140 2023/24 have no personal allowance.
Self-Assessment Tax Return
If you’ve received earnings in excess of £100,000 in a tax year, you must submit a self-assessment tax return, even if your income has already been taxed under PAYE. HMRC should contact you to inform you. It is worth noting that even if no extra tax is due, you will still be liable to substantial penalties if you fail to submit a return.
Adjusted Net Income
Your adjusted net income is your total taxable income before any Personal Allowance and after certain tax reliefs, for example;
- trading losses if you are self-employed or in a partnership
- donations made to charities through Gift Aid
- pension contributions
This is where those high earners with an Adjusted Net Income above£100,000 start to lose their personal allowance. The allowance is reduced by £1for every £2 earned above £100,000.
Child Benefit Considerations
If either you or your partner earns above £50,000 you will be liable to additional tax the ‘High Income Child Benefit Charge’ to claim back part or all of the child benefit you received during that period. It does not matter if the child living with you is not your own child.
Using your ‘adjusted net income’ you can work out if your income is over the threshold using the Child Benefit calculator.
If your income is over the threshold
You can choose to either:
- get Child Benefit payments and pay any tax charge at the end of each tax year
- opt out of getting payments and not pay the tax charge
If either of you earns £60,000 the full amount of benefit you've received will be reclaimed, and it's simpler to make an election not to receive child benefit.
Pensions contributions are an extremely tax efficient form of investment and the benefit is even greater for high earners. This is because pension contributions reduce your Adjusted Net Income so can save you up to 60% and up to 62% if contributions are made via a salary sacrifice scheme as National Insurance contributions won’t be included.
It’s worth noting that you will pay income tax on your pension during retirement, so really the Income Tax savings are a deferral of tax. However, most people will pay a significantly lower rate in retirement.
Most people can contribute up to £40,00 per year into their pensions, but the annual limited is restricted for very high earners.
You’ll have a reduced (‘tapered’) annual allowance in the current tax year if both:
- your ‘threshold income’ is over £200,000
- your ‘adjusted income’ is over £240,000
You can work out your reduced annual allowance at Gov.uk here.
You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1,073,100.
Charitable donations made under Gift Aid have tax advantages for the organisation receiving the donation, who can claim a 20% uplift in your donation (the effect being to also pass to them the basic rate tax you've paid on that income). Higher and additional rate taxpayers can claim an additional tax relief from their Income Tax. Of particular relevance to this guide is the fact that such donations are deducted from your income when calculating your Adjusted Net Income. This means they may be saving you further tax, at up to 60%.
Tax Efficient Investments
Although, with the exception of pension contributions, these won't help alleviate any of the tax pitfalls for higher earners, making use of tax efficient investments is still an important part of tax planning for high earners. At Blue Rocket Accounting, we have built a network of trusted investment advisors whom we can connect you with at your request. Simply ask us to arrange an introduction and we’d be happy to connect you.
Salary Sacrifice Schemes
In addition to the benefits of pension salary sacrifice, some employers offer schemes which are also an effective way of saving you Income Tax and National Insurance, such as:
- Childcare vouchers(subject to restrictions on the amount you can benefit from on childcare vouchers, and the phasing out of this benefit)
- Cycle to work schemes
- Ultra-low emission vehicles including company cars
- Retraining courses and outplacement services
- Buying additional annual leave
These may be saving you tax at up to 62% depending on your marginal rate of Income Tax.
Tax relief for locum doctors
As a locum doctor you may work via an agency or the NHS, or you may decide to operate through a limited company. There is additional guidance and advice about tax relief for locum doctors provided by The British Medical Association who advise speaking to an accountant before setting up as a limited company. Read more at Tax relief for locum doctors (bma.org.uk)
If you would like to discuss your options or find out more about how we can help manage your tax affairs, speak to us at Blue Rocket Accounting today on 01322 555442.
Free up your precious time for more important things.