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14 March 2024

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Personal finance: Action to take before the end of the tax year

Mazars accountants Neelum Ali and Thomas Scrupps explain how GPs and practice managers can avoid getting caught up in tax traps before 5 April

Are you ready for the end of the 2023/24 tax year? Make sure you are not affected by the tax traps and missing out on additional allowances or benefits, with these top tax tips. In this article, we discuss action GPs and practice managers should take before the end of the tax year – 5 April 2024.

First, are you in the 60% tax trap?

You can pay wildly different marginal rates of tax depending on your earnings and personal circumstances. They are:

£0-£12,570: Zero. But this tax-free allowance is only in place if you earn less than £100,000 overall.

£12,571-£50,270: 20% (basic rate) on non-saving income and 8.75% on dividend income. This applies regardless of whether you earn more or less than £100,000.

£50,271-£100,000: 40% (higher rate) on non-saving income and 33.75% on dividend income. This also applies regardless of whether you earn more or less than £100,000.

£100,000-£125,140: 60%* effective rate. This is because the tax free allowance (£12,570) is reduced by £1 for every £2 you earn over the £100,000.

£125,140+: 45% (additional rate) on non-saving income and 39.35% on dividend income.

(Different rates and bands apply to non-saving income and non-dividend income of Scottish taxpayers for 2023/24. For 2023/24 the Welsh rates are the same as for the rest of the UK, except Scotland.)

To provide an example, let’s say that during 2023/24, you have total income of £120,000:

  • As your income exceeds £100,000 by £20,000, you will lose £10,000 of the personal allowance (£1 of personal allowance for every £2 of income over £100,000).
  • This £10,000 of extra taxable income (due to the loss of the personal allowance) will be taxed at 40% so you would pay an additional £4,000 income tax.
  • This is on top of the £8,000 due on the £20,000 income in excess of the £100,000 threshold.
  • Therefore, the £12,000 income tax as a result of the extra £20,000 income gives an effective income tax rate of 60%*.

And this is all before considering national insurance!

You may also be in the tax trap on childcare costs

We all know how expensive childcare is. Our GP clients rely heavily on the entitlement of up to 30 hours a week free childcare for their children. Even if one parent has taxable income of more than £100,000 a year, they are not eligible for this policy. This can massively impact your disposable income, especially in high-cost areas and where you have two or more pre-school children.

What can you do to avoid the 60% tax rate and losing your tax-free childcare?

Clearly, losing your tax-free childcare and the 60%* rate is a punitive result. However, there are some tax-efficient tips available to alleviate this, but action must be taken before the tax year ends.

In both cases the adjusted net income must be kept below £100,000. Adjusted net income is your taxable income, less any losses, less gross gift aid donations and less gross pensions contributions (except those deducted via gross salary under net pay arrangements).

Tip 1 – Make charitable donations under Gift Aid

Making charitable donations under Gift Aid are treated as being paid net of basic rate tax and increase the basic rate band by 20% of the grossed-up contribution, thereby increasing the proportion of your income taxed at the lower rates.  

Additionally, gross gift aid payments will effectively reduce your income, potentially bringing it below the £100,000 threshold and consequently restoring the full personal allowance. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%*. 

Bringing your adjusted net income below £100,000 will also avoid the loss of the tax-free childcare.

Tip 2 – Make personal pension contributions

Pension contributions made by individuals are treated as being paid net of basic rate tax and increase the basic rate band by 20% of the grossed-up amount (this does not include those paid under salary sacrifice or employer contributions). These are treated in a comparable way to charitable donations having the effect of bringing the adjusted net income below £100,000 and provide effective income tax relief of up to 60%*. It is worth noting that income tax relief in excess of the basic rate may need to be claimed via the self-assessment process.

However, consideration should be given to the Annual Allowance, which represents the maximum an individual can contribute to a pension in the tax year and still receive the associated tax relief. For active members of defined benefit pension schemes, such as the NHS Pension Scheme, a proportion of the Annual Allowance will already be utilised. If the combination of defined benefit pension scheme (E.g. NHS Pension Scheme) accrual and additional, personal contributions exceeds the Annual Allowance, a tax charge may well be incurred.

The key point to note in respect of the NHS Pension Scheme, or any defined benefit pension scheme, is that a calculation is carried out to determine the level of pension growth/accrual (relative to the Annual Allowance). The percentage contributions made from salary/profits do not necessarily directly correspond to the amount of Annual Allowance used.

Recent changes to the Annual Allowance have relieved these pressures for many, but some individuals may still exceed it (particularly those making significant pension contributions and/or approaching £200,000 per annum of income).

Individuals should also be aware that there are a number of options for making additional contributions to pensions. Contributions can be made to private arrangements or, in some circumstances, can be used to purchase additional pension in a defined benefit pension scheme (or affiliated defined contribution arrangements). There are naturally pros and cons associated with each option, and guidance should be sought based on individual circumstances.

*In Scotland the effective rate of tax is 67.5%

Neelum Ali is a tax manager and Thomas Scrupps is a chartered financial planner in the Mazars healthcare team

A version of this story was first published in our sister title Pulse