Liz Densley is often get asked ‘Is it worth working harder and earning more? Or am I paying it all in income tax?’ Here she explains a better balance.
There are certain ‘crunch points’ at income levels where it can make a material difference, depending on various circumstances, to different types of tax liabilities.
There are different effects, for example at all these levels of earnings:
- £6,205, £8,424, £11,850. £18,330, £46,350, £50,000, £100,000, £110,000, £150,000
And for different types of income:
- Dividends (£2,000),
- Interest (could be £1000 or £500),
- Self employment (£1,000),
- Rental income (£1,000),
- Rent a room (£7500)
Then there are pension tiers to take into consideration – and at the high end of the scale, pension reliefs and annual allowance charges.
The very low income figures probably won’t apply to many doctors, but there are plenty of situations that are likely to affect a large number of freelance or sessional GPs.
Unfortunately, there’s no clear ‘rule of thumb’ with so many things to be taken into consideration – each set of circumstances is likely to be different. Here are two examples below of what can be particularly expensive areas:
A couple (married or not) with one person claiming child benefit for two children could save a huge amount by sharing work and childcare rather than one working and one staying at home.
Total earnings of £100,000 with one person working would have £58,074 net income (ignoring expenses for the purposes of this example). If instead each worked throughout the year and earned £50,000 each, then the joint net income would be £71,071. A total saving of nearly £13,000!
This is achieved by keeping income under £50k so as to retain the whole of the child benefit, which also results in a much lower tier rate for the pension contributions. It will also achieve the use of both personal allowances and eliminate higher rate tax.
I have not assumed either are paying student loan repayments – but if both are doing so, then the repayments would be much less too – saving about £1650 (although that does of course mean more interest and longer to repay the loan)
This is perhaps an extreme example, but it is always worth looking at the balance of earnings between a couple, and calculating the tax effect of each increase in income.
Another situation where there can be huge tax differences usually affects people who’ve been high earners in the NHS pension scheme for a good while. If income exceeds £110,000 and the calculated pension input (not the contributions themselves) added to this takes income over £150,000 – then the £40,000 pension allowance starts to get reduced down to £10,000. So this could give rise to a further £13,500 of tax without any specific income to pay it out of. The extra tax cannot be ‘scheme paid’ either.
More doctors are going to be hit with this additional charge as unused relief from earlier years gets used up. The calculations can be very complex, and most will need professional assistance to work out what the ‘pension input’ is to enable a correct tax return to be made in advance of NHS Pensions being able to provide you with a ‘pension savings statement’ to confirm your pension input. And as you all know, confusion in the pensions’ administration since local offices were disbanded, means a much higher risk of the figures being incorrect.
In summary the answer to ‘is it worth me working harder’ will depend on a calculation – yet another reason to get tax information to your accountant early – and tell them if there can be flexibility in the way you work – so that they have time to give you positive advice, rather than just a last minute compliance service.
Liz Densley is medical specialist partner with Sussex Chartered Accountants, Honey Barrett, and is secretary of AISMA (the Association of Independent Specialist Medical Accountants). Contact her at email@example.com.