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This month our business of dentistry guest post is from Priya Kotecha. Priya is a partner and chartered accountant with Mac Kotecha & Company, a practice with a very strong focus on dentistry (the firm acts for over 260 UK based dentists).
Priya loves what she does and loves talking with clients and answering their tricky questions. She has written a very useful blog post for TeethWise answering five of the most common questions she is asked by dentists. She tells us that clients often feel silly asking questions but you shouldn’t!!!
Anyway here are five common questions Priya gets asked that are normally prefixed by “I know I should really know the answer but….”
1. “If I get tax relief on something at 100%, does this mean I get 100% taken off my tax bill?”
If something is 100% tax deductible, it means you get 100% of it deducted from your taxable income to arrive at your taxable profit on which you pay tax, so it means 100% is deducted from your taxable income, but only a proportion is actually deducted from your tax bill (say 42% of it if you are a higher rate taxpayer). For example, if you go on a CPD course that costs you £500 and you are a higher rate taxpayer, £500 will be deducted from your profit which effectively means you pay £210 less tax!
2. “I know my income has gone up a bit this year, but the tax seems to have gone up even more! Why?”
If you are self employed, HMRC will always assume that your taxable profit each year will be the same as the previous year so when they ask you to make payments on account of the next years tax bill, these are based on the previous year. For example, let’s suppose your taxable profit was about £78,000 in the year to 05/04/13. Your income tax and national insurance on that may come to approximately £25,200. Therefore, HMRC will ask you to pay half of that towards your tax bill for the year to 05/04/14 in January 2014 and another half in July 2014. So you will have paid £25,200 for 12/13 but will also pay another £25,200 on account of 13/14. So far so good?
Let’s suppose your profit in the year to 05/04/14 has actually increased to £100,000. Your tax may actually be closer to £34,400 now. So in January 2015, firstly you have to pay the shortfall of £9,200 (£34,400 – £25,200) and secondly you have to pay half of £34,400 again towards 15/16. A double whammy!
3. “I heard I can get tax relief on my travel costs – is this correct?”
Yes! Absolutely but only for work travel which unfortunately does not include commuting (travel to and from work) but should include travel between practices (if you work at more than one) as well as other business travel.
4. “Will I pay less tax if I form a limited company?”
You may do but it depends on your individual circumstances. This is a good question and needs more investigation with your accountant!
5. I have hardly taken any money out of my practice – why do I still have to pay so much tax?
If you are self employed – you must pay tax on your profits, irrespective of what you actually use of that. If your profit was £1m (well done you!) and you only took £1,000 out – you would still pay tax on the £1m! If you have formed a limited company, the company will pay tax on all of its profits after taking account of any salary it has paid you on which the company gets tax relief.
You then have to pay tax on what you take out of the company (salary on which the company gets tax relief and dividends on which it does not).
Priya Kotecha (FCA, DipPFS) is a partner & Chartered Accountant with Mac Kotecha & Company, established for over 28 years, where her and the senior partner deal exclusively with dentists. They offer Accountancy, Taxation & Payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues. Contact on or go to www.specialistdentalaccountants.co.uk