The Unknown Tax Trap Costing Doctors Thousands

If you exceed your pension annual allowance, HMRC will apply a tax charge at your marginal rate of income. Your marginal rate of income tax is your highest rate of income tax. So if you've crossed by, let's say, $20K, they'll charge you 40% of $20K. So at that point, dividend tax begins to look very attractive. Um, so basically, if you pay someone an admin salary, that can be deducted. You pay your accountant, that can be deducted. Buy an electric car exclusively for for your business, that can be deducted. Of course, there are other things. You can gift money. If you give money to charity, you can deduct it as well. If you're not using your ISA allowance, you're wasting it, okay? It's either you use it, unless you're using your pension allowance and that's all the money you have to invest, but any money you put into your ISA, there's no tax on it. If you save money in your cash ISA, there's no tax on the money you save in your cash ISA. So any other question around allowances?

Yes, please, I have a question.

Yes, okay, go for it.

Um, thank you for that. Um, so you know how, um, when you've maxed your $60K allowance, pension allowance for the financial year, you would get a charge for it? I've never really understood how much the charge is, and the reason I'm asking is because I'm considering, um opening a director's pension from a limited company, and I'm thinking if I carried forward the previous 2 financial years that I've not contributed— well, I contributed into pension but I've not maxed it— which is better for me? Even if I, you know, go above the £60,000, which is more tax efficient? Is it going above the £60k or letting myself fall for the dividend, um, tax on dividends, which is going to be like 33%.

That— this is a fair question, Bukky. You're basically trying to run a mathematical analysis to know which one between the devil and Ndubuisi 'Andy.' Yeah, because I'm just afraid of that 33%, essentially. Between the rock and a hard place. But I can tell you Um, basically, because I know you're in the Mastermind, you have some one-on-one, and I have a little bit insight into where you are. Um, it's not going to pay you to cross the HMRC pension allowance. Why? Because if you exceed your pension annual allowance, HMRC will apply a tax charge at your marginal rate of income. So for those who don't understand, your marginal rate of income tax is your highest rate of income tax. So if you are a higher rate taxpayer, your marginal rate is 40%. If you're an additional rate taxpayer, your marginal rate is 45%. If you're a higher rate taxpayer, basically your income is above £50,271. The first £12,570 is 0%. Between £12,571 to £50k270 is 20%. Now the rest of it is at 40%. So if you cross that, they're going to charge you 40%. Of however amount you cross. So if you've crossed by, let's say, 20K, they'll charge you 40% of 20K. So at that point, dividend, dividend tax begins to look very attractive. Don't you forget also that if you're earning money, which is basically what we're going to next, what Abel was asking about, if you're earning money through your limited company, you still got some levers to pull. Expenses. I know you said you haven't got that many expenses to make. But we'll go through the list again. The expenses, one place I've told you, if you don't have a staff who does your admin or helps you to live a stress-free life, I've got someone whose job is to look at my emails, calendar, booking. You know her, you've worked with her. So basically, if you pay someone an admin salary, that can be deducted. You pay your accountant, that can be deducted. For some of you, you join my mastermind, you pay through your limited company. I call it director's education. That's an expense. Buy an electric car exclusively for your business, that can be deducted. Sometimes today I took like, um, some of my team out and then we didn't even spend up to the money that is allowed. You can spend up to £150, um, for an annual party. Or it could be Halloween or Christmas party. That's £150 per person. That means if I've got 16 members, that's £900 there that I can spend. Um, so there's quite a list which we are going to go through, and I've also shared the checklist in the WhatsApp group. I can reshare it again. That lists all the things you can deduct through your limited company.

Okay. Okay.

I think I'll just, um, talk to the accountant and see which, which way forward.

Talk to the accountant. Come and talk in the group. Yeah. Part of what we do during the tax hack is we share what we've been deducting. You'll be surprised at what people deducting with their company. That's the value of that group. You realize, oh, I didn't realize that I could take $30K and put in my pension. Like, you know this now, but some people didn't realize they could put money in their pension.

Okay.

And then have it deducted.

I didn't know it weeks ago either, so—

oh, thanks.

You know it now. That's good. Right, Shelley, you go.

This could save you several thousands of pounds, not just in your taxes and pensions. Have you fallen into the 60% tax trap as a doctor healthcare professional without even knowing? It's crazy. I know you think the highest tax you can pay is 45%, but here's how it works. If your income exceeds £100,000, you start to lose your personal tax allowance, and by the time you hit about £125,000, you've lost your entire tax allowance. This means you're paying an effective tax rate of 60%. That's not good. You lose a lot of other benefits with it. Now, if you, if it's something you've never thought about or you're worried, you're not sure how to navigate it, you're in luck because I've written a very clear guide with a 10-point checklist that you can use to avoid the 60% tax trap. One of the biggest ones is obviously paying more into your pension, but there are 9 other steps you can take. Check the link in the description and download it for free. Let me know if it it helps. Let's jump right back into the episode.

Hi, Shelley.

Thank you. Hi. Um, so my question is just basically about recommendations for an accountant for this self-assessment.

I'll drop it in the group. I'll drop it in the WhatsApp group. Yeah, I've got like a fantastic one. I'll drop in the group. And if you've got an accountant you're not sure of, um, some accountants, I don't know if they are bad or they don't care. Some of them don't care.

It's not their money.

Um, I'll drop all that in the group. Synergy Accountants, they're not, they're not bad. They know what they're doing. I'll drop the contact to the group. Okay.

All right. Thank you.

You're welcome. Okay. Yeah. Yes, please.

Hi. Um, I think my question is simple, so. Okay. Uh, I've slightly been pushed to the higher— is it higher income?

Just a bit, slightly pushed.

Yeah, so I think I'm not, I'm not paying so much tax. And what is it called? So I got this brown envelope asking me to pay back some amount of money just because when the assessment, they found out I've been slightly pushed above this cut-off, 50 to 71. And it means that my take-home is still back to what it was before I got a new job with I mean, yeah, it was, it was an exciting offer, but at the end of the day, I'm getting exactly what I was earning before. So I think just to summarize quickly what I've understood so far, so you're saying that the way to push myself back to the maybe the 20% is by increase— is it doing salary sacrifice?

Let me, let me summarize it. It's by paying your future self. So the way to do that is to take some of that money and pay into your future yourself. And that might be whether you want to do it through additional pension contribution through your workplace or salary sacrifice, or you want to do it through a personal pension. You've just put the money into your future self. And then why some people talk about investing, I said, well, you can invest through your ISA, your pension. So by putting the money into your pension, you could still invest it basically. and that will be kind of like investing for your future. Of course, there are other things. You can gift money. If you give money to charity, you can deduct it as well. If— but most people don't give like, um, $10K to charity per tax year, but you can put $10K into their pension. So these are some of the ways to deduct your— to reduce your adjusted net income.

Okay, thank you. How can I practically, how can I do this? That's the one that is not clear to me. So I understand someone can easily open a SIP— it's a SIP account— but what about the NHS salary sacrifice? How is that done?

Oh yeah, so that will be your pension administrator. So if you get your workplace, a good place to start would be from your pay If you call the pay office basically and say, I like to do a salary sacrifice, then they'll direct you to the appropriate person. So it's gonna be from your pension administrator, but that'll be from your workplace. It's not something you can do and transfer by yourself, unlike SIP, which you can open by yourself. Um, if opening a SIP is an issue, I've recorded a whole video on opening a SIP and I'll put it in the drive for the tax hack. And share it in the group so that you guys can use it anytime you want to open a SIP. All right.

Thank you so much.

Excellent. So I'll take this last question from Fanny. Okay, Fanny, go for it. Can you hear me clearly? Yeah.

So the thing is that I am the only working person in my family. My wife is not working. So when I spoke with my accountant, he said that open a limited company, and because my wife is looking after my kids and everything, you make as a salaried, what, salaried thing and deposit some of the money into your wife's, as in, what, like the normal pay that I used to do for pay for the looking after the family and everything as the employee. Can I do that?

Right, okay. I think we've got to be careful here. About how we frame it. So here's, here's the thing. You're earning income, your wife is not earning income, and then when we get to clawback, you'll see something crazy about how high-income child benefit— your wife looking after your children is not working your company.

Yeah.

So you can't pay them. But here's the thing, your wife could be an admin assistant in your company.

Okay.

She could be like, um, a support staff in your company. And what else can she be? An advisor, a consultant. But admin is straightforward. Um, she's doing real work in the company. It's all about how we frame things. Your wife doing work in your company makes her eligible to be paid a salary. Now that means that you could pay her £12,570 and she doesn't pay any tax at all.

Okay.

Because she's below the limit. Yeah. You could pay her £50,000 and she only pays 20% tax. So obviously the tax efficient place will be £12,570. And then that's for some of you, you've got like children who are 18 years or 17 years and they're not working. Think about it. We've had, I, I had this brilliant doctor, I consult NHS consultant, my mastermind. So my mastermind is my 6 6 months financial coaching where we're going to invest in estate planning, everything. We have one-to-one sessions. You get access to my AI and then the Drive and all that stuff for 6 months. This consultant employed the son. She's a NHS consultant. The son was her admin assistant and helped with some things like preparing presentations and all that kind of stuff, email. And paid the son. The son was about, say, 15 or 16, was paying his son £9,000 per year. Okay, not crazy, below tax band, £9,000 per year. But guess where the money went? The son wisely puts all that £9,000 in his junior ISA. Okay, now that Junior ISA money is then invested in the stock market for the son in a broad, well-diversified index fund. There's no leak. The whole money has gone from into his account into a Junior ISA. There's no tax on anything ever. Does that make sense?

Yeah, yeah, yeah, I got it.

Yeah, good. Now I hope you know as well, if your wife is not working, she also has a pension allowance even if she's earning £0, she has a pension allowance of £3,600. Okay, so yours is £60K, hers is £3,600. Um, but again, she can't put in £3,600, she can put in £2,880, and the government will gross it up for her, will give her tax relief that will bring it up to $3,600. So that will be 25% of the money she puts into the pension.

Okay.

The government will contribute tax relief on the money she's never actually paid tax on. Does that help?

Yeah, yeah, yeah, that's fine.

Yeah, yeah.

Uh, one more question. Do you suggest any private pension, any private pension that is best in the market or anything like that?

I will share in the group. Basically, there are multiple private pensions, but I would usually say it depends on what you're going for. I'll give an example. One, I'm, I'm saying things I'll share in the group. That's why I like it being recorded so I'll remember what, but maybe somebody will pop it in the WhatsApp group so I'll remember what I said I'll share. Private pension. I think you have to think about a number of things. If you've got a smaller portfolio, less than $250K, there are lots of good ones that have online availability and we're not affiliated to any particular SIP provider, but I think everyone has to think about this SIP thing is a long-term thing. I can't access my SIP till I'm 55 or 57 from 2028. So I want to have the right platforms, right? And I'm just going to touch on the rest of allowance so that, um, we can move things forward. There's ISA allowance. I'm not going to spend too much time on it. I think we know the ISA allowance. Can someone tell me Just in the chat, how much is the high allowance for lifetime ISA? How much can you put into your lifetime ISA each tax year? Lifetime ISA, £4K. Yes, that was just a bit of a trick question. So £4,000 you can put into your lifetime ISA. So, but your total ISA allowance in the year is £20,000. So you can put in £4,000 in lifetime ISA. I'm putting £16K in the rest. Or you can decide, you know what, I'm just going to jam my £20K into my Cash ISA and save it. Or you can decide I'm going to put my £20K into my Stock and Shares ISA. I can do it £10K, £10K. Of course, from 2027 April, that changes. Cash ISA would only have an allowance of £12K. Okay, that's ISA allowance. If you're not using your ISA allowance, you're wasting it. Okay. Either you use it, or let's say using your pension allowance and that's all the money you have to invest. But any money you put into your ISA, there's no tax on it. If you save money in your cash ISA, there's no tax on the money you save in your cash ISA. If you save money in your— if you invest through your stock and share ISA, then you don't have to pay 24% capital gains tax. That means that if, um, Ada and I are both investors and we've invested over the last 20 years, and I've been putting 20K each tax year through my ISA and investing in. And Ada has been putting 20K into her general investment account, or what they call dealing account, the same amount of money. And we bought exactly the same thing, and we both did so well. Now put 20K over the next 20 years, that's 400,000. Let's say at the end of the day we end up with a portfolio of 1.4 million. So we've both done all right. I'm going to end up with my entire £1.4 million is going to be mine, but Ada has made capital gains tax of £1 million. So first of all, they would deduct capital gains allowance. How much you can deduct before tax? For her, currently is £3,000. So by the time they remove that £3,000, whatever is left, she would have to pay 24%. Of whatever is left. I'm just going to use £1 million. 24% of £1 million is £240,000. That's a lot of money to pay. So that's why it's good to understand these ISA allowances and use them. Don't forget about for children, there's a £9k Junior ISA which they can use less than 18 years. Okay, right.