Dental partnership accounting and pension tax planning using the cash basis
A real‑world example of how accounting method choice can prevent unnecessary pension tax charges
Introduction
We were recently introduced to a dental partnership by a financial adviser after the dentists became concerned that they had been hit with an unexpected tax charge on their pension contributions.
Their concern was simple but serious:
“We’ve been told we owe additional tax on our pension — could this have been avoided?”
To answer that question, I reviewed the partnership accounts together with my colleague Katherine Flood, to understand what had caused the issue and whether better planning could have prevented it.
Table of Contents
The problem: pension tapering after a spike in partnership profits
Each of the partners in this dental partnership had exceeded £260,000 of income, which triggered the pension annual allowance taper.
This meant:
- their standard £60,000 pension allowance was reduced, and
- they suffered an annual allowance tax charge at their marginal rate of 45%.
What made this particularly frustrating was that the increase in income was driven by a one‑off spike in partnership profits, rather than a permanent increase in underlying cash earnings.
This raised an important question:
Was this tax charge unavoidable — or was it caused by how the accounts were prepared?
What stood out in the accounts
The key issue became clear very quickly:
the partnership accounts had been prepared on the accruals basis.
There’s nothing inherently wrong with accruals accounting. However, for dentists — particularly those with fluctuating income — it’s always worth asking:
Is the accruals basis still the most suitable method?
Since 2024, the cash basis has effectively become the default accounting method for most unincorporated businesses, and dental partnerships are often particularly well suited to it.
Reworking the figures using the cash basis
To understand whether the pension tax charge could have been avoided, we reworked the figures using the cash basis of accounting, adjusting for typical timing items such as:
- trade debtors
- trade creditors
- stock
- prepayments
- accruals
While we didn’t have access to the previous accountant’s full working papers, we were confident that the direction and scale of the adjustment were correct.
The result was clear.
The outcome: a significant tax saving
On a cash basis, the partnership’s taxable profits were materially lower.
Crucially, this would likely have kept each partner’s income below the £260,000 pension taper threshold, meaning:
- ✅ the pension taper would not have applied, and
- ✅ each dentist could have avoided a pension tax charge of close to £8,000.
This appears to have been an entirely avoidable tax charge, caused not by the pension advice given, but by the choice of accounting basis used in preparing the accounts.
The good news: it’s often not too late
In many cases, situations like this are still fixable.
There is often time to:
- reassess whether the cash basis is more appropriate, and
- amend accounts and tax returns where permitted.
With the right advice and timely action, adverse pension tax outcomes can sometimes be reduced or eliminated altogether.
The wider lesson for dentists
This case highlights an important point:
Good tax planning isn’t always about complex schemes — sometimes it’s about asking the right question at the right time.
For dentists, those questions often include asking their accountant:
- Does the current accruals basis still make sense?
- Could accruals accounting be pushing income into a year where it causes pension tapering or other tax issues?
For many dental practice partnerships, the cash basis can be a simple but powerful planning tool when used correctly.
FAQs
How do I know if I’m using the cash basis or accruals basis?
Check your accounts or tax return notes. They will usually state whether they are prepared on the cash basis or accruals basis.
What’s the quickest way to tell from my accounts?
If your accounts include trade debtors, trade creditors, stock, prepayments, or accruals, you are almost certainly using the accruals basis.
What does cash basis accounting mean in simple terms?
Under the cash basis, you are taxed when money actually goes in or out of your bank account, not when income is earned or expenses are incurred.
What does accruals basis accounting mean?
Under the accruals basis, you are taxed on income when it is earned, even if you haven’t been paid yet, and expenses are deducted when they are incurred, not paid.
Why does this matter for dentists?
For dentists, the accounting basis can significantly affect taxable income, pension annual allowance tapering, and unexpected tax charges, especially in years with fluctuating profits.
When should a dentist review their accounting basis?
You should review your accounting basis if:
- your income is near or above £260,000
- you’ve suffered pension tapering
- profits fluctuate year‑to‑year
- you’ve had a one‑off spike in income
✅ Call to Action
Are you a dentist worried about pension tax or high income?
If you:
- have seen a spike in profits,
- have been hit with a pension annual allowance charge, or
- want to check whether the cash basis could reduce your tax bill,
we’d be happy to review your position.
👉 Get in touch for a no‑obligation review of your accounts and pension position.
For financial advisers
If you work with dentists and want an accountant who understands pension tapering, cash basis planning, and dental partnerships, we’re always happy to collaborate.
👉 Contact us to discuss how we can support your dental clients.
