Tax & Expenses
It’s estimated that 4 out of 5 UK adults will overpay their tax and expenses this year. As doctors, with marginal wage increases and inevitable inflation, our pay has in real terms been eroded over the last 10 years.
We have outlined a few things you can do to really help minimise your tax bill and keep more of your hard earned money:
Claim Your Tax Deductible Expenses
Whatever kind of doctor you are, you will have expenses which are necessary for you to work. The HMRC allows you to claim for these against your tax. The process is fairly simple and can return £1000’s back into your pocket. You are only allowed to claim back expenses for the last 4 tax years (6th April to 5th April) so make sure you don’t lose out by delaying.
We have made a brief list of possible expenses, though these vary on your individual circumstances:
- GMC fees
- Indemnity (MPS/MDU/MDDUS)
- Royal College fees
- Exam fees (such as MRCP/MRCGP)
- Home office expenses
- Uniform such as Scrubs & theatre clogs
- Repair/replacement of equipment (Stethoscope, Otoscope, Loops)
- Mobile Phone Bills
There are two main ways to claim your expenses;
1. Online via HMRCs personal tax portal or via the p87 form (these methods are limited to claims of up to £2500 in a tax year)
2. Via a self assessment tax return.
If all of this seems quite daunting and you would rather spend your time doing something more enjoyable (we understand).
An accountant is often a very cost effective way on maximising your earnings and takes that hassle away from you.
We at thelocumlife.co.uk recommend TaxScouts, their online system is simple and easy to use, they guide you through the whole process and you have a dedicated accountant who will do all the hard work for you and answer any questions you have. We have negotiated a special rate for our members of £107 to complete your Self Assessment tax return, and its tax deductible!
Making Your Savings Work For You With An ISA
With a normal savings account, you pay tax on the interest you earn (above a certain threshold)
Individual saving accounts or ISA’s are an efficient way to save money as you pay;
– No tax on interest earned
– No tax on dividends received
– No capital gains tax
The current yearly ISA allowance is £20,000 and if it isn’t used it is lost. There are a few types of ISA but the majority of the perks come from Stocks and Shares ISA’s.
A cash ISA works in a similar way to a normal savings account but tax free. The returns on your savings are quite small currently due to low interest rates and often won’t beat inflation so it will be devaluing in real purchasing power terms.
A stocks and shares ISA allows you to buy stocks and shares within an ISA. All the dividends you receive will be tax free and if the value of your shares increase and you decide to sell, you will not pay any capital gains tax on it. It is important to remember however that investments into stocks and shares can rise or fall and you may not get back as much as you put in.
We at thelocumlife.co.uk recommend using Fidelity stocks and shares ISA
Avoid the hidden 60% tax bracket
You may be asking what the 60% tax bracket is as most people haven’t heard of it. Though if you plan to be, or you already are, a locum doctor who works hard and starts to earn over £100K per year you need to listen up.
The table shows the standard tax brackets as of 2020/2021 tax year.
Though what many don’t realise is for every £2 over £100k you earn your personal allowance (0% tax) is reduced by £1 until all of your personal allowance is removed at £125000.
I’ll give you an example; Dr Dre earned £125,000. In total he would pay £42,500 in Tax.
The £25,000 that Dr Dre earned over £100,000 has been taxed as follows:
1. 40% tax on the lost Personal Allowance (£12,500 x 40% = £5,000)
2. 40% tax on the £25,000 which is within the higher rate band (£25,000 x 40% = £10,000)
This part of Dr Dre’s income is taxed at 60% (£15,000 tax on £25,000 income)
Being aware of this hidden tax is one of the biggest steps to minimising it’s impact.
If this is effecting you, seek professional advice from an accountant and financial advisor. There are a number of strategies to help with this such as increasing pension contributions (described below), specialist investments (EIS & VCT) or simply minimising your traditional income to utilise other tax allowances.
Utilise Your Pension
Utilising your pension is a very important way to minimise your current income tax requirement and imperative for planning for your retirement in the future. A key feature of your pension is at the time of saving, the money is tax free.
Example 1 – Dr Phil, is in the 40% tax bracket and adds £1000 to his pension pot, automatically it will become £1250 as the pension provider will be able to claim back the 20% basic rate tax relief of the tax paid on the income, and a further 20% of the initial value (£1000) as he was in the 40% tax bracket can be claimed by via Dr Phil’s tax return. So his £1000 investment into his pension pot will actually be worth £1500 in real terms.
Though utilising your pension can go even further such as in example 2.
Example 2 – Back to Dr Dre, he is earning £125,000, after seeking advice from a professional he adds £20,000 into his pension. The pension provider automatically will claim basic rate tax relief (20%) which will increase his pension to £25,000.
This will change how his tax is calculated by adding the £25,000 to his basic rate band as per the chart below. This also allows him to regain his £12,500 (0%) personal allowance
This results in only £32,500 in income tax having to be paid, compared to £42,500 before. A saving of £10,000 in tax.
So putting the £20,000 into his pension has only cost him £10,000 but also has given him £25,000 in his pension.
Limited Company And Umbrella Companies
There are three main ways locum doctors can get paid;
- PAYE (Pay As You Earn)
- Umbrella Company
- Limited Company
PAYE is how most employees in the UK pay income tax.
Deductions for income tax are taken directly from your pay check and calculated by your tax code.
The amount of tax you pay is based on your annual earnings and which allowances and deductions you have claimed.
The income tax alongside national insurance contributions and student loan repayments, depending on your circumstances, are then transferred to the HMRC without you needing to intervene.
- Accepted across all hospitals
- Minimal personal involvement required.
- Easy to be set up
- Fast payment
- For the majority of people the best method
- Tax code errors can occur if working via multiple different companies which can cause significant fluctuations in pay. This is often settled by a phone call to HMRC or through tax returns.
An umbrella company is a business which acts as an employer for a worker. They are responsible for receiving your pay and taking the necessary deductions for income tax, national insurance, student loan etc and passing these to HMRC. They also process your time sheets and invoices.
Umbrella companies charge for their services which means, if they were doing everything they should, you would receive less than if you were earning via PAYE. Lots of umbrella companies however claim they can give you take home pay of up to 90% of what you earn! As tempting as this may sound, many of these companies practices are, at best questionable but quite often illegal. In recent years a number of these companies have been targeted by HMRC and the workers using them required to repay the taxes which hadn’t been paid.
Many NHS trusts no longer allow for employment via an umbrella company which is another consideration to bear in mind.
- They handle processing invoices and timesheets
- Many NHS trusts no longer accept employment via umbrella companies
- Fee for using umbrella company
- Difficulty finding a reputable umbrella company
- Increased chance of HMRC scrutiny
Some locum doctors work via a limited company as this can be a more tax-efficient way of getting paid.
This allows the holder to split their income between salary and dividends, allowing opportunities to render parts of their overall income subject to more favourable tax rules.
Due to recent changes to the rules surrounding contracting requirements (IR35), most locum doctors will have income tax and national insurance contributions taken at source from the NHS trust or Agency. This can ultimately result in higher taxes being paid when working via a limited company compared to PAYE in a large proportion of cases.
Specialist advice is recommended if you are considering going down this route, as running a limited company also comes with substantial administrative work.
Additionally a number of NHS trusts will no longer entertain hiring locums working via limited companies which should also be kept in mind.
- Allows income to be split across income and dividend.
- Can allow access to favourable tax reliefs
- Can result in additional taxation if falling within IR35
- High administrative burden
- Requires yearly accounts to be submitted
- Company rules must be followed.
- Limited NHS organisations allow locum workers to be paid via limited company.