How to maximise your tax-free allowances and contributions ahead of the new tax year

With the end of the tax year fast approaching, there’s no better time to start thinking about spring cleaning you finances.

Paying particular attention to your tax-free allowances and reliefs is always a good place to start. Aaron Prested, Specialist Dental Financial Adviser for Wesleyan Financial Services, answers key questions around making the most of this tax year:

How should dentists utilise their personal savings allowances to get the most benefit?

Aaron Prested (AP): One of the considerations that I'd certainly be looking at is individual ISA allowances. These allowances are currently £20,000 per person, and that can be a mixture of cash ISAs, stocks and shares ISAs, innovative finance ISAs.

If an individual is aged between 18 and under 40, they could also invest into a Lifetime ISA. They're able to save up to £4,000 in those per year, up to age 50, and they'll qualify for a 25% bonus on that contribution. For context, if someone put £4,000 into a Lifetime ISA, that 25% bonus is worth £1,000.
This could be used for retirement or it could be used towards the purchase of a house. It’s a great allowance, so it’s not one to miss.

In terms of pension contributions, how do they support a dentist in terms of their financial planning?

AP: This probably tends to be the most sought-after information for a dental financial adviser. Looking at the current tax year, my view would be, start to analyse how much you've paid into a pension.

That's quite straightforward for defined contribution pension schemes – such as a personal pension. You'll make contributions to that scheme and receive government tax relief. If you pay £10,000 into the pension, with the government's tax relief, that would be £12,500, that would be then set against the Annual Allowance, which currently sits at £40,000 or 100% of UK relevant earnings, whichever figure is lower.

As an example, we’ll use a dentist who has earnings of £60,000. If they've only paid £12,500 into a pension where we can see that their full allowance will be £40,000 for the year, they've got quite a bit of wriggle room with further pension contributions.

Where it gets complicated is for defined benefit schemes, the best example being the NHS Pension Scheme. How much you make or how much you pay in as contributions to that scheme, that isn't the figure that you would set against your Annual Allowance.

Let's say you've made pension contributions of £8,000 over the course of the tax year, it isn't the figure which is set against the £40,000 Annual Allowance. The figure that is set against it is far more complicated and it involves an actuarial calculation which goes on in the background and is, in effect, a calculation that determines how much growth has taken place within your pension.

It's complex, which is why I would actually probably engage with a financial specialist in this area sooner rather than later, just to see where we think you might be in the current tax year when it comes to your Annual Allowance.

There are a lot of moving parts because dentists could be part of perhaps more than one of the NHS Pension Schemes, which is quite a common scenario.

You could have a dentist, for example, who is fully private and isn't making any contributions to the NHS Pension Scheme, but they have got a deferred scheme in the background due to previously working within the NHS, which is still accruing. This will continue to use up some of their Annual Allowance over the course of a tax year. You need to be mindful of personal pensions and how much room you might have left in your allowance to make further contributions.

Pensions are incredibly tax efficient due to the nature of tax relief. And if you're a higher rate taxpayer, you get a further reduction in your tax bill, if you're doing the self-assessment.

The first thing I tend to look at with clients is what they have used up in terms of their personal Annual Allowance for the current tax year, to see whether there's some wriggle room there to make pension contributions, being mindful of things like pension Lifetime Allowance as well.

There are very few areas that work this way - the tax relief on pensions and the bonus on Lifetime ISAs are two examples that I can think of straight away where you'll get something back with regards to your contributions.

What happens if you don't use your Capital Gains Tax exemption? Is there a risk that a dentist might lose that?

AP: The Capital Gains tax-free allowance is £12,300, and that, much like the ISA allowance, runs from tax year to tax year.

Just to explain how Capital Gains Tax works, it's a tax which is due on the profit, which is released from the sale of a chargeable asset. If you bought shares, for example, at £50,000, and then you sold them at a £100,000, you've made a gain of £50,000.

So there would be tax due on that £50,000 depending upon your tax status. What I mean by that is whether you are basic rate taxpayer or a higher rate taxpayer, and it's something that's worth covering off with your accountant.

But conversely, if you've made a loss on an asset, that can be used to offset gains that you've made in other areas. In terms of claiming for any loss, it must be included on your self-assessment tax return.

Is there anything that dentists need to think about in regard to Inheritance Tax or annual gift allowances before the new financial year?

There are exemptions for Inheritance Tax, or allowances there, which can help perhaps mitigate some of the inheritance tax issues.

You are able to make a total of £3,000 worth of gifts per year. You can carry forward unused gifts for previous tax years as well. If you never made a gift in the last tax year you could carry it forward and make a £6,000 gift in the current tax year.

Often when it comes to Inheritance Tax, in the case of a married couple with their own main residence, their actual inheritance tax nil-rate band might be as high as £1 million. So once you're over that limit, making gifts of £3,000 pounds here and there doesn't really make much of a dent in the overall value of an estate.

Inheritance Tax is levied at 40% on assets above the nil rate band. The issue you occasionally see is, if a larger estate was worth £4 million (for example), all it takes is for the assets to be accruing at a rate of, let's say 10%. If you've got the stock markets going up, if you've got property prices rising, a 10% growth on a £4-million estate is £400,000 in that year and it becomes difficult to start reducing the estate by small gifts alone.

So, these allowances, while being beneficial and should be taken advantage of, don't solve the full issue in large estates, but every little helps and there can be other areas to look at to support this particular financial planning area.

If you’d like further advice on how to maximise your finances, you can speak to a Specialist Dental Financial Adviser at Wesleyan Financial Services as part of a no-obligation financial review by visiting wesleyan.co.uk/dental or call 0800 316 3784.

Bear in mind that the value of investments can go down as well as up and you may get back less than you invest. Inheritance Tax planning is not regulated by the Financial Conduct Authority. Tax treatment depends on the individual circumstances and may be subject to change in future.

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About Aaron

Aaron Prested has been a Specialist Dentist Financial Adviser at Wesleyan Financial Services for 10 years, supporting dentists with their financial planning.

Wesleyan Financial Services has supported hundreds of dentists to make the best decisions for their personal and practice finances, spotting financial opportunities and reducing risks that are unique to the profession.

Advice is provided by Wesleyan Financial Services Ltd.

‘WESLEYAN’ is a trading name of the Wesleyan Group of companies.

Wesleyan Financial Services Ltd (Registered in England and Wales No. 1651212) is authorised and regulated by the Financial Conduct Authority and is wholly owned by Wesleyan Assurance Society. Wesleyan Assurance Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Incorporated in England and Wales by Private Act of Parliament (No. ZC145). Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: 0345 351 2352. Fax: 0121 200 2971. Calls may be recorded to help us provide, monitor and improve our services to you.