Doctors, especially those working in private practice or as general practitioners, often find themselves in higher tax brackets due to their significant incomes. This situation naturally leads to more taxes and a higher tax burden. Effective tax planning for doctors is crucial in this context, not just to comply with tax laws but to ensure that you retain more of your hard-earned money.
Understanding expenses: What can doctors claim?
As a self-employed GP or a doctor running a private practice, managing your tax liabilities through allowable expenses is a critical strategy for financial efficiency. The UK’s tax authority, HMRC, allows certain expenses to be deducted from your income before tax is calculated, provided these are incurred wholly and exclusively for the purposes of your profession. This includes paying:
- Professional memberships: Fees associated with professional bodies such as the BMA (British Medical Association) and GMC (General Medical Council) are deductible.
- Medical equipment: This covers the cost of specialist equipment required for your practice.
- Office supplies: Expenses related to the day-to-day running of your office, including postage, stationery, and office supplies, can be claimed.
- Professional literature: Subscriptions to medical journals and publications relevant to your field are also allowable expenses.
Expenses that are not typically allowable
Understanding what you cannot claim is just as important as knowing what is deductible. Expenses that fail to meet the “wholly and exclusively” criteria are not allowable. For instance:
- Training and professional development: Costs associated with training or courses aimed at furthering your career are not typically deductible as they are considered an investment in your future rather than a necessity for your current role.
- Commuting costs: Regular travel to and from your primary place of work, including meals eaten during these commutes, do not qualify as business expenses.
Claiming for exceptional costs
There are exceptions when it comes to income tax planning for doctors, especially when your work demands unusual travel or out-of-pocket expenses. If you travel to a patient’s home or a location that is not your usual place of work, you can claim costs such as:
- Travel expenses: Costs incurred from using your personal vehicle for professional visits can be claimed, based on the standard mileage rate set by HMRC.
- Accommodation and subsistence: If your professional duties require overnight stays, these costs can potentially be deducted, assuming they are reasonable and necessary.
Estate planning: A necessity for doctors
Effective estate planning is vital for anyone, any medical professional, but it is particularly crucial for doctors due to the high value of many medical professionals’ estates. Estate planning ensures that your assets are transferred to your heirs in the most tax-efficient manner possible.
Key considerations in estate planning
- Inheritance tax (IHT): Estates valued above £325,000 are subject to a 40% IHT rate. However, the residence nil-rate band may increase the threshold if you’re passing your primary residence to direct descendants, potentially allowing you to pass on up to £500,000 tax-free.
- Utilising allowances and exemptions: The transfer of any unused tax-free allowance between married partners or civil partners can effectively double the amount of the estate that is protected from IHT.
Strategies to minimise IHT
Planning ahead can help mitigate potential IHT liabilities:
- Lifetime gifts: Gifting assets during your lifetime can reduce the value of your estate. However, the seven-year rule must be considered, as gifts made within this period may still be taxable if you pass away within those seven years.
- No benefit retention: It is crucial that you do not retain any benefit from the assets you give away—doing so can nullify their status as gifts for tax purposes.
Tax planning for locum doctors and company directors
Locum doctors and medical professionals who operate their businesses face unique tax planning challenges and tax savings opportunities:
- Optimal salary and dividend strategies: Drawing a modest salary can help minimise income tax and National Insurance contributions. Dividends, while taxed at lower rates, provide a mechanism for extracting profits efficiently.
- Pension contributions: These not only reduce your tax liability but also enhance your future financial security. As a business expense, pension contributions made by the company can significantly reduce overall taxable profits.
Navigating Capital Gains Tax for Doctors
Capital Gains Tax (CGT) often affects doctors, particularly those who invest in property or shares as part of their financial strategy. Understanding CGT and its implications is essential for effective tax planning and financial management.
What is CGT?
CGT is a tax on the profit you make when you sell an asset that has increased in value. It is the gain or taxable profit you make that is taxed, not the total amount of money you receive. For doctors who own additional properties beyond their main home, or who have investments in stocks, understanding and planning for CGT is crucial.
CGT allowances and rates
Each tax year, individuals have a CGT allowance, known as the Annual Exempt Amount. For the current tax year, this allowance is set at £12,300. Profits exceeding this amount from the sale of assets are subject to CGT. The rate of CGT you pay depends on your total taxable income. For instance:
- Basic-rate taxpayers: CGT is charged at 10% on gains from most assets, and 18% on residential property that is not your main home.
- Higher and additional-rate taxpayers: For these taxpayers, the rates increase to 20% on gains from most assets and 28% on residential property.
Strategies to minimise CGT
- Utilise the Annual Exempt Amount: Each year, you have an allowance that exempts a certain amount of capital gains from tax. If possible, plan disposals to spread any potential gains across multiple tax years to maximise use of this exemption.
- Offset losses: If you sell an asset at a loss, this loss can be used to offset future gains. Keeping precise records of any losses is essential, as these can be carried forward indefinitely to offset future gains.
- Transfer assets strategically: Transferring assets between spouses or civil partners can be a useful strategy. Each partner has their own CGT allowance, so transferring assets can help utilize both allowances and reduce the overall CGT liability.
- Consider the timing of sales: Timing the sale of an asset can have significant tax implications. For example, if you expect a change in your income that may move you between tax bands, planning the sale to coincide with a lower tax rate year can reduce the amount of CGT payable.
CGT and retirement planning
For doctors planning for their retirement savings, CGT plays a critical role in tax saving strategies, especially when considering the sale of investment properties or a share portfolio. Planning sales and understanding the tax implications can significantly affect your retirement funds and tax efficiency.
Capital Gains Tax need not be a deterrent to investing. With careful planning and strategic decision-making, you can minimise its impact on your finances. As medical professionals, understanding every aspect of your tax obligations—including CGT—is crucial to your financial decisions, maintaining your financial health and ensuring that you can focus fully on your essential work.
Need expert guidance?
Tax planning for doctors in medical practice is a complex area, particularly for doctors whose financial and professional circumstances are unique. JCS Accountants specialises in providing bespoke tax advice for medical professionals who have to pay tax. Whether you need guidance on reducing taxable income, managing business expenses, or planning for retirement, we are here to help.
Through diligent management of allowable expenses, strategic estate planning, and intelligent extraction of profits, you can significantly lower your tax bill and enhance your financial position. Remember, professional advice is invaluable in navigating the specifics of tax law and maximising your tax benefits.
Contact us to discuss how we can support your financial health and career longevity, paying tax efficiently.
