So now you’re self-employed
Sophie Kwiatkowski, an accountant from chartered accountants, PFM Dental Accountancy, offers advice to new associates on tax, expenses and more.
This article was first published in Young Dentist Autumn 2016.
The transition from being employed to self-employed can often be daunting. The shift towards being responsible for your own calculation and payment of taxes is an unknown.
A key concept to grasp is bookkeeping. As a self-employed dentist, you will be responsible for keeping your income and expenses in order, so that accounts and a tax return can be prepared each year. As it is a legal requirement and you can face penalties if a tax return is submitted with incorrect information, accurate and regular bookkeeping is a good routine to get into.
What to keep
As an associate, you will receive monthly schedules from your practice principal showing your monthly earnings as well as deductions such as lab bills and superannuation. These will need to be kept as proof of your income. You will also need to keep proof of any business expenditure. Records of other information for your tax return such as bank interest, gift aid contributions or rental income will also need to be retained.
The list of business expenditure that can be claimed to improve your tax position is comprehensive. Common expenses that can be claimed include the costs of courses/training (including travel and subsistence), professional subscription costs, mobile telephone expenses and protective and work clothing purchased. If you have to buy any dental materials or equipment, such as loupes, these are also allowable expenses. HMRC provides guidelines for self-employed sole traders in respect of certain expenses that can be claimed, such as use of their home as an office and laundry costs. HMRC also provides specific advice regarding motor expenses. The key point is that travel costs to and from your regular place of work are classed as private use, and are not allowable for tax purposes.
When to pay your taxes is another important concept to understand. Tax returns are made up to 5 April each year and the payments are due the following 31 January and 31 July. The January payment is made up of the balance due for the previous year, as well as a payment on account as an advance towards the current tax year. The July payment is the second payment on account. The sooner after the 5 April you get your information to your accountants the sooner you can know the tax liability due, giving you more time to plan your finances. I recommend you set aside at least 35 per cent of your self-employment income each month towards your tax bill. The other benefit to getting your information sorted early in the tax year is that you can receive advice on your superannuable earnings for the annual NHS reconciliation.
The annual declaration of Net Pensionable Earnings (NPE) is required by 30 June each year. As the figures you confirm annually are used to calculate your pension entitlement, it is important to make sure you are accepting an accurate earnings figure. As a self-employed associate, the responsibility lies with you to ensure that the figure is correct and not confirmed until you are happy with it. This is a specialist area so seeking advice on this is something I strongly recommend.
I am sure for most of you starting associate positions in August/September you will have a lot of questions. The areas discussed above are highlighted merely to give an introduction into the world of self-employment. Having a specialist dental accountant to guide you through the setting-up of your sole trader business and during the first few years is really beneficial.