Jon Drysdale and Adam Hemingway of specialist dental financial advisers and accountants PFM Dental cover the financial issues facing new associates.
If you have just secured your first associate post and start self-employment in late summer, then congratulations! You may be expecting a healthy uplift in income once you start your new job and we would like to share with you our experience of how to manage this financial transition.
Do I have to tell HMRC I’m self employed?
Yes – you will need to register with HMRC within 3 months of becoming self employed. There is likely to be a fine if you don’t do this. We offer to register all new associates on their behalf and provide guidance at that time on: when their first tax bill will be due and how much they will need to pay. We offer an accountancy meeting without charge for all new associate clients to discuss this.
Who takes care of my tax bill?
You do! In actual fact if you become self employed in August 2013 you may not have to pay your first tax bill until January 2015. Thereafter tax payments will be due in January and July. HMRC offers this concession to those who become self employed for the first time. However beware – your first tax bill may be substantial.
How much of my income should I save for tax?
This largely depends on what your income will be. An associate with income of £60,000 might expect to pay approximately 30% of this in tax. You should also factor in Class 2 and 4 National Insurance (NI) contributions. If you have a student loan you will be expected to pay 9% of your income towards this at the same time as paying your tax bill. We suggest you seek guidance specific to your circumstances from a dentally aware accountant as the required savings will depend on your projected income.
What does an accountant do for me?
An accountant should act as your ‘tax adviser’ which involves submitting your annual tax return and preparing your annual accounts. Accounts preparation ensures that you offset your taxable income with business related expenditure. It is important to provide your accountant with records of any expenditure related to work. We can also help associates claim for the cost of some courses and study materials incurred before they started their first job. Your accountant should offer proactive guidance on issues that might save you tax and more detailed guidance on how best to structure your business as your career develops.
Should I have a dental accountant?
We only offer accountancy services to dentists so you might expect us to say yes! However we have witnessed some serious issues with clients who have been ill-informed by an accountant who isn’t dentally aware. Many times this involves the NHS Pension scheme. We strongly recommend that you engage a dental accountant who has chartered status and is regulated by the ICAEW. (Institute of Chartered Accountants in England and Wales).
Will I be able to get a mortgage now that I’m self-employed?
Most mortgage lenders will ask for at least 2 years self-employed accounts to support a mortgage application. You won’t have these for several years. Even though your income might justify a reasonable level of borrowings, ‘High Street’ lenders are unlikely to understand how you are remunerated and from experience most will reject an application without 2 years accounts. It is important to seek advice from an independent adviser who knows which lenders have more flexible lending criteria.
Is my income protection still adequate?
If you arranged a policy during your final year at University or during DF1, then the level of cover will need to be reviewed. You may have signed up to this policy without considering the alternatives. Most policies arranged in the year before or after qualification will be reviewable premium policies (e.g. Dentists’ Provident, Wesleyan), so you should consider a guaranteed premium option as an alternative. This removes the risk that premiums will increase in the future. If you arranged income protection through a non-dental financial adviser or your Bank then it is unlikely to be occupation specific and will need to be reviewed.
What should I do with spare income?
A Cash ISA is a good starting point for savings which need to remain accessible (e.g. your tax bill). The maximum allowance is currently £5760 pa. Unlike a standard bank account you don’t have to pay tax on the interest or declare the interest on your tax return. For savings in excess of this amount we suggest an internet savings account, however beware of notice periods, fluctuating interest rates and penalties on withdrawals. Be wary of offshore institutions. If a bank is not UK based and/or UK regulated you will not be covered by the UK Financial Services Compensation Scheme.
If you are considering buying a property then an offset mortgage is an ideal way to shield savings from tax and reduce the term of your mortgage.
Do I need a longer term financial plan?
This is definitely a good idea, especially when you consider retirement may be some 40 years away. With government pressure on public spending it is highly unlikely that the NHS Pension will survive in the current generous format for the next 40 years. We suggest you have a back up arrangement whilst remaining in the NHS Pension scheme where possible. There are several options here which vary in tax efficiency and risk. The most financially secure dentists approaching retirement now are those who have had a longer term plan in place for many years. Simply, the earlier you start the less you will need to contribute.
Who should I go to for Financial Advice and what does it cost?
We advise that you only take independent financial advice. It is important that your adviser understands how dentists are remunerated and the complexities of the NHS Pension scheme, so they should be a dental specialist. Fees for financial advice vary, although you should expect to pay an initial fee for pensions and investments. Advice on income protection will involve your adviser being paid a commission, however your premium should be the same whether you apply for this directly or through an adviser. Importantly an independent adviser can search the whole of the market for the most suitable policy. A restricted adviser can only recommend a limited range of financial products so is best avoided.
I’m keen to buy a practice, how soon can I do that?
Ideally you should have at least 5 years post-qualifying experience, if you are planning to borrow money for a practice purchase. Banks will expect a substantial deposit (10%-20%) and loans of over £350k may be problematic if you don’t have the required experience and deposit. Furthermore the bank will scrutinise the practice you intend to purchase and the financial information needs to demonstrate adequate profitability. Specialist advice is required here.
PFM Dental is one of the leading specialist providers to dentists within the UK offering: independent financial advice, a practice sales agency, practice valuations, and chartered accountancy services for the dental profession. Established in 1990 PFM Dental are founding members of ASPD (Association of Specialist Providers to Dentists) which includes specialist dental accountants, solicitors, valuers, financial advisers and healthcare banks.
For more information contact: www.pfmdental.co.uk | 0854 241 4480