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Tax - the basics

Doctors pay for a wide range of goods and services during their training and employment, including:

  • travel and accommodation
  • subscriptions to professional bodies, colleges, associations and trade unions
  • training courses, exams and certificates.

This guidance covers the basics of how tax is paid and the essentials of completing a tax return. It explains the types of expenditure you can claim tax relief on, such as your pension, and how to make a claim. It also covers working as a locum, using a limited company and the tax implications of working abroad.

Although this guide aims to provide as much information as possible, tax is complicated, so if you need help with a specific problem please contact the BMA at 0300 123 1233 or email an adviser.

You can also contact HMRC with your tax queries, such as completing self-assessment tax returns, PAYE tax codes, claiming employment expenses and technical tax information.

Find a qualified accountant through the Institute of Chartered Accountants


This guidance was developed with the valuable assistance of Ernst & Young – who you can contact for a no-obligation conversation and quote on any of the topics covered above.

 

Tax - the basics

The UK’s tax and customs authority is HMRC (Her Majesty’s Revenue and Customs).

The UK tax year runs from 6 April to the following 5 April. Taxpayers’ annual earnings are assessed each tax year, rather than a calendar or employment year.

Any forms or claims submitted to HMRC must be completed on a tax-year basis.

  • Income tax and National Insurance rates

    Income tax is charged at different rates based on the level of your income.

    Generally, everyone is entitled to a tax-free personal allowance – where no income tax is charged – of £11,000 for the current 2016/17 tax year. If your income exceeds £100,000, the personal allowance is proportionately reduced to nil.

    Basic, higher and additional rates

    If your income exceeds the personal allowance, you will be taxed either a basic, higher or additional rate depending on taxable income thresholds. Taxable income thresholds change each tax year.

     

    Basic rate

    Income tax is charged at the basic rate – 20 per cent up to a threshold of £32,000 for the 2016/17 tax year.

     

    Higher rate

    Taxable income between £32,001 and £150,000 is charged at the higher rate of 40 per cent.

     

    Additional rate

    Income that exceeds £150,000 is charged at the additional rate of 45 per cent.

     

    The starting tax rate of 0 per cent on savings income, eg bank interest up to £5,000, applies for the 2016/17 tax year.

    You also pay National Insurance contributions on your income. This is charged at different rates according to your level of income.

    Find out more about current income tax rates and National Insurance rates.

  • Personal savings allowance

    A PSA (personal savings allowance) was introduced from 6 April 2016, where tax is no longer automatically deducted at source from interest payments and interest will be paid gross by banks and building societies. Under the PSA, basic rate taxpayers can earn up to £1,000 and higher rate taxpayers up to £500 in savings income tax-free. No PSA is available to additional rate taxpayers.

    Savings income includes:

    • interest from bank and building society accounts
    • accounts with providers like credit unions or National Savings and Investments
    • interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
    • income from the Government or company bonds and most types of life annuity payments.

    Interest from ISAs (individual savings accounts) does not count towards the PSA.

    You do not need to do anything to claim your PSA. HMRC will collect the tax through an adjustment to your PAYE (pay as you earn) tax code. Banks and building societies will provide HMRC with the information they need to do so.

    If you complete a self-assessment tax return, you should include the interest details as normal.

    Read HMRC guidance and useful examples of how the PSA operates.

  • Taxation of dividends

    From 6 April 2016, you no longer pay tax on the first £5,000 of dividends you get in a tax year. Any excess will be taxed at a rate of 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher and 38.1 per cent for additional rate taxpayers.

    Further, the dividend tax credit will no longer to apply so dividends will no longer be grossed up. As a result, taxable income will be lower, which may positively affect the high income child benefit charge, the restriction of personal allowances, and the reduction in the annual allowance for pensions – all of which depend on certain income thresholds.

    Important: the first £5,000 of dividends still count towards the basic rate band. Whether or not you will benefit from a reduction in your tax liability on your dividend income will depend on the amount of income received and the tax band this income falls in to. See the examples below.

     

    Dividend allowance examples

    Basic rate and higher rate taxpayer with £9,000 dividend income assuming personal allowances already used against other income:

     

    2015/16

    2016/17

    Basic rate tax payer

    0% effective rate
    No tax liability

    £5,000 x 0%
    £4,000 x 7.5%
    Tax of £300

    Higher rate tax payer

    25% effective rate
    Tax of £2,250

    £5,000 x 0%
    £4,000 x 32.5%
    Tax of £1,300

     

    Potential impact for the taxpayer if they earn £8,060 as salary and the balance as dividends:

    £50,000 Income

    £100,000 Income

    £200,000 Income

    Tax Year

    2015/16
    £

    2016/17
    £

    2015/16
    £

    2016/17
    £

    2015/16
    £

    2016/17
    £

    Dividends (net)

    41,940

    41,940

    91,940

    91,940

    191,940

    191,940

    Salary*

    8,060

    8,060

    8,060

    8,060

    8,060

    8,060

    Total Income**

    50,000

    50,000

    100,000

    100,000

    200,000

    200,000

    Taxable Income

    43,560

    39,000

    104,724

    89,000

    221,327

    200,000

    Tax Payable

    2,599

    4,300

    16,925

    20,550

    47,825

    58,821

     

    * Salary based on NIC primary earnings threshold
    ** Total income for 2015/16 is net of 10% notional tax

    Read HMRC guidance on how the dividend allowance operates

  • High income child benefit charge

    You may have to pay a tax charge known as the ‘High income child benefit charge’ if you or your partner has an individual income over £50,000 and either:

    • you or your partner receive child benefit
    • someone else receives the child benefit for a child living with you and they contribute at least an equal amount towards the child’s living expenses.

    The charge can apply even if the child living with you is not your own child.

    You can opt out of receiving child benefit payments and avoid the high income child benefit charge.

    If you are not already submitting annual self-assessment tax returns and are in receipt of child benefit, you need to consider registering for self-assessment (see section 2 below).

    Read HMRC guidance on how the charge operates and use the child benefit tax charge calculator


  • Rental income and profit

    Rental income

    Rental income from UK properties is taxable in the UK regardless of whether the owner is a UK resident. Tax is charged on taxable rental profit, which is the rental income less any allowable deductions including genuine repairs, agents’ fees and finance costs such as interest paid on loans to purchase a let property.

    If you receive income from property letting you need to report the income and tax-deductible expenses on a self-assessment tax return. If you are not already submitting annual self-assessment tax returns, you need to register for self-assessment.

    Rental profit

    Rental profit from property owned jointly is generally split and taxed in accordance with the beneficial ownership of the property. When purchasing a property, you can consider whether it should be held your name, in a spouse’s name, jointly or through a corporate structure. This can affect how any underlying rental profits are taxed and the capital gains tax treatment when the property is sold.

    Up to 5 April 2016, landlords could claim a wear and tear allowance for fully furnished residential properties. From 6 April 2016, this was abolished and instead relief is given with the replacement of domestic items allowance.

    From 1 April 2016, a 3 per cent surcharge on the purchase of residential properties (other than the first purchase or replacement of an individual’s only or main residence) has also been introduced under both SDLT (stamp duty land tax) and LBTT (land and buildings transaction tax).

    From 6 April 2017, restrictions apply to the income tax relief available for finance costs incurred by an individual who is in receipt of rental income from residential property.

    If you are receiving rental income, you need to consider these changes and should seek professional advice.

    See HMRC’s toolkit to help landlords determine their tax liability

  • PAYE tax codes

    HMRC collects tax due on employment income each month through PAYE (pay as you earn). PAYE is operated using a tax code, issued by HMRC, which an employer uses to calculate how much income tax to deduct from your gross salary. This is deducted automatically before you receive your net salary.

    The tax code includes the net allowances and deductions to which you are entitled and can include employment-related expenses. We recommend you check your tax code carefully as there can be errors.

    Additional sources of income and PAYE

    Being taxed at source under normal PAYE rules is fine for many individuals as it is a simple process that doesn’t require you to do any accounting or tax preparation. However, for doctors with additional sources of income, it may not be the most tax-friendly way of working as you are restricted in the expenses you can claim - see ‘Tax relief for locum doctors’ for more information on this.

    Find more information on tax codes and advice on what to do if your tax code is incorrect