We are often asked by locum doctors if setting themselves up as a limited company will save them tax and thus potentially make their earnings higher. This is a straight forward question which I am afraid there isn’t a simple answer to. We have summarised some information below around the key areas individuals need to consider. This will then allow you to have an informed discussion with your specialist accountant.
Can I incorporate?
This may sound like an odd question, but it is worth ensuring that incorporation is an option for you. The notes below around IR35 are one of the biggest sticking points when it comes to engaging with NHS bodies and you also need to consider your indemnity cover if carrying out private work. If you want to retain contributions to the NHS pension scheme, operating through a limited company may not be suitable for you. Also, contracts must be assigned to an individual - not a company. It is therefore crucial to discuss with your customers if they would be comfortable with you incorporating your business.
How does a limited company operate?
It is important to remember that limited companies are separate legal entities and as such have their own legal identity. This therefore means that any work they carry out, even if it is performed by an individual, belongs to the company.
The term ‘limited’ refers to the limited liability that owners of the company enjoy. Under normal circumstances, any issues within the company remain within it and any company debts cannot be pursued to the shareholders. This excludes scenarios where it can be shown there has been gross negligence or misconduct.
Companies have two main types of ‘people’ involved within them. Firstly, there are directors; these individuals manage the day to day running of the company. Secondly, there are shareholders who own the company and can benefit from profits. Ordinarily in any owner managed business (OMB), directors and shareholders are the same person, but it is still important to understand the distinct differences.
There are several tax planning opportunities when it comes to limited companies. The main and most significant one is that you are personally only taxed on any money you withdraw from the company. For certain high earning individuals who don’t need all the profits they earn, this can be a large saving. There are also several ways in which profit can be extracted depending on the owners needs, including salary, dividends, benefits in kind and pensions to name a few.
However, it is important to note that the company is an entity in its own right as discussed above, and as such, it will be taxed separately by HMRC. Profits within a company are (currently) taxed at 19%, therefore if taxable profits are £100,000, £19,000 of this is paid to HMRC in corporation tax before any profits can be paid to shareholders.
Secondly, any profits that are extracted by the owners via salaries / dividends and benefits are then taxed at rates ranging between zero percent and 45% percent, depending on your overall earnings.
It is therefore essential that proper planning is carried out on your personal circumstances as you can potentially end up paying more tax as a limited company.
Following changes in legislation brought in from 6 April 2017, IR35 has reared its head again for the public sector. These changes pose potentially large issues for GP practices and hospitals and resulted in some areas effectively banning the use of limited companies. Thankfully the panic has subsided, and the correct interpretation of the rules has now filtered through and each circumstance is being considered in its own right. However, it is important to note that as a company, should any issues with IR35 potentially arise, the liability for income tax and National Insurance may lie with yourself rather than the NHS or GP practice.
Of course, one major consideration for any locum doctor is access to the NHS pension scheme. With all of the changes that have occurred over the past few years, more and more medical professionals are questioning the value of the scheme. This is, of course, a separate conversation altogether and independent specialist advice should be sought before you make any drastic decisions.
As a rule, limited companies do normally prevent access to the scheme for an individual; this of course could be a deliberate pension planning exercise and could be a costly mistake if done accidentally.
The rules are quite black and white and if you are currently completing locum A and B forms and paying across pension contributions on your locum income, you will no longer be able to do this if you incorporate. There are different rules for GMS/PMS and APMS contracts as these incomes can be pensioned, however the benefits noted above are often overturned by this approach.
As noted, there is no black or white answer to the question as to whether to incorporate or not. It really does come down to the individual circumstances of the doctor asking the question. What may be right for one doctor isn’t necessarily the same for another, the important thing is not to follow the crowd and instead seek specific specialist advice before you commit to making a decision.
Phil Harnby ACA is the director and owner of Mitchells Grievson Ltd, a firm of Chartered Accountants and business advisors in the North East specialising in the healthcare sector. He has written many articles for the medical press, as well as presented at the BMA and other specialist national events. He is highly regarded by his clients for his layman explanation of often highly complex financial matters, allowing them to make informed decisions about their finances and business.
The Handpicked Accountants profile for Mitchells Grievson can be found here.