In recent years we have seen more and more GPs set themselves up as limited companies without taking advice.
I’d like to set out some of the pro’s and con’s so that GPs can make more of an informed decision on this very important matter.Do not just assume that using a limited company will save lots of tax! In many circumstances it can, in others it can be extremely costly. There is no general rule of thumb which will point directly to a company or not as the best course of action; it’s necessary to look at the figures and your personal situation.
Things to consider
Do you wish to continue to contribute to the NHS pension scheme – and if you want to opt out, have you taken proper professional advice about this so you fully understand what you are giving up? You cannot put locum work through a limited company and still pension that income. Putting any entity between you and the practice will prevent you from contributing for that source of income.
If you’re happy to leave the NHS pension scheme then:
What do you expect your gross fees to be on an annual basis? If you are likely to exceed the VAT turnover limit, there could be an argument that your company is providing staff (on which you would have to charge VAT) rather than providing healthcare itself (which would be exempt). If you have to add 20% to your fees, which you would pay over to HMRC, then you are either going to earn less or charge your practices more, which may not be acceptable.
If your turnover is less than about £80k p.a. and you don’t want to be in the NHS pension scheme then:
Are you going to be working directly for one business/practice where you are effectively employed by them? Using a company puts the risk on to you and you will need to consider whether the anti-avoidance legislation IR35 applies to you. You need to look at each separate contract on its own to see if it will apply to that source of income.
If you are a genuine locum, earning less than £80k who don’t want to pension the income through the NHS scheme, then:
- If you have a low earning spouse you want to involve in the business, a company will probably make good sense.
- If you don’t, then you’ll need to look more closely at your own financial position and actually run the figures.
In certain circumstances a company can help to:
- Reduce personal income to under £100k – and thus claim the benefit of full personal allowances.
- Reduce personal income to under £50k (if you are the higher earner of a couple) so that you do not lose your child benefit.
- Reduce personal income so you pay your student loan off more slowly and thus increase current cash flow.
- Delay income, so you only pay corporation tax at (currently) 20% and then take dividends out when you are earning less (perhaps while on a maternity break) and thus paying a lower rate of tax.
If none of those considerations apply, then it’s a matter of balance between salaried work and freelance work and how much you need to take out of the company.
Recent changes to dividend taxation have made it less beneficial than it was to have a company in most cases.
However, corporation tax rates are planned to reduce to 17% over the next few years, and the government has expressed a wish to get them to 15% eventually. That would swing the balance back towards a company, but beware as there has also been talk of changing how small ‘one man band’ companies are taxed, effectively taxing the whole of the income as if it were earned personally by the individual. So if that happened, you would be unlikely to be able to benefit.
Also consider the costs and hassles of running a company. You need to prepare and submit formal statutory accounts (so they cost more); you need to keep paperwork to show that you have considered distributable profit levels before you pay a dividend; you need to comply with PAYE rules (and face penalties if you don’t); you need to keep company money separate from your own and ensure that business costs are paid by the business with contracts in the business name and personal costs are paid personally and not through the business. Borrowing from your company can give you surprise tax liabilities if you don’t repay it within a time limit. None of this is insurmountable, but it may be the tipping point if the tax savings are very small.
A few examples of tax savings are set out below. These are not cash flow changes; for this purpose I have ignored pension contributions altogether. The net cash in pocket will be better for a company because of the savings from not paying into the NHS scheme, but the cost of that is the loss of pension scheme rights of course.
A single practitioner earning £75k of freelance fees and £40k salaried might save just £600 a year after costs if all profits are taken as dividends with just a low salary from the company.
The same single practitioner earning £75k of freelance fees with no salaried work might save £1100.
A married practitioner with a wife not earning elsewhere and sharing in his business, with £75k of freelance fees and £30k salaried could save nearly £9k of tax/NIC, and keep his income under £50k so as to retain his child benefit (which for two children would be worth £1,788 a year).
You need to calculate the effect of a company in your particular circumstances to see if it is worthwhile – and remember your circumstances will change, so what is right one year may be wrong the next. We had one case recently with a high salaried doctor with a lot of out of hours work. Whilst married to a non-working wife he was saving £7-8k a year, on divorce with just a £2k reduction in his gross earnings this changed to a cost of just over £100.
And if that isn’t depressing enough, we wait to see exactly what the rules will be for personal service companies providing services to the public sector from next April. It will then be down to the ‘ultimate user’ – i.e. the practice or out of hours provider – to make the decision as to whether your contract is such that you would be employed were it not for the company in the middle. They are likely to err on the safe side, as it would be very costly for them if they get it wrong, and treat you as liable to PAYE/NIC deductions. This is likely to hit long term locums in a particular practice and out of hours doctors in the main. Genuine locums should be ok, but we await the detailed rules.
So to summarise, using a company can save you a lot of tax/NIC, but it may not. Seek specific professional advice before committing yourself.