Locum doctors often ask if setting themselves up as a limited company will save them tax and potentially increase their earnings. This is a complex question and unfortunately there is not a straight forward answer. Our summary below covers the key areas individuals need to consider which will allow you to have an informed discussion with Mitchells Grievson Chartered Accountants.
Can I incorporate my income?
Although this may sound like an odd question it is worth ensuring that incorporation is an option for your income. One of the biggest issues when it comes to engaging with NHS bodies arise in relation to the notes below around IR35. Indemnity cover also needs to be considered if you are carrying out private work. Operating through a limited company may not be suitable for you if you want to retain contributions to the NHS pension scheme. Also, if contracts must be assigned to an individual and not a company. Therefore, it is crucial to discuss with your customers if they would be comfortable with you incorporating your income.
Limited companies - How do they operate?
Limited companies are separate legal entities and as such have their own legal identity. This means that any work carried 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 company debts cannot be pursued to the shareholders (see below) and any issues within the company remain within it. However, this excludes situations where gross negligence or misconduct can be proven.
Companies have Directors and Shareholders involved within them. Directors are individuals who manage the day to day running of the company. Shareholders own the company and can benefit from profits. In most owner managed businesses (OMB's), directors and shareholders are the same people, however it is still important to understand the distinct differences.
Tax Planning
Limited companies bring several tax planning opportunities. The most significant opportunity is that you are personally only taxed on any money you withdraw from the company. Some high earning individuals who don't require access to all the profits earned can benefit from a large tax savings. Also, there are several ways in which profit can be extracted from the company depending on the owners needs, including salary, dividends, benefits in kind and pensions to name a few.
As covered above, it is important to remember that the company is an entity in its own right, and it will be taxed separately by HMRC. Currently, profits within a company are taxed at 19%, therefore if a company has taxable profits are £100,000, £19,000 would be paid to HMRC in corporation tax before any profits can be paid to shareholders.
Plus, profits that are extracted by owners via salaries, dividends and benefits are taxed at rates ranging between 0% and 45% percent, depending on overall earnings.
Therefore, it is essential that appropriate tax planning is carried out on your personal circumstances as you could potentially end up paying more tax as a limited company.
IR35 – How could it affect you?
Legislation brought in from 6 April 2017 has caused IR35 to rear its head again for the public sector. Specifically, organisation that have responsibility under Freedom of information requests which includes GP Practices and NHS Hospitals. The changes could potentially pose large issues for GP practices and hospitals and have resulted in some areas effectively banning the use of limited companies. Thankfully the correct interpretation of the rules has now filtered through and each circumstance is being considered in its own right. However, should any issues with IR35 potentially arise as a company it is important to understand that the liability for income tax and National Insurance may lie with yourself/your company rather than the NHS or GP practice you are doing sessions for.
Pension scheme
One of the major considerations for any locum doctor is access to the NHS pension scheme. The many changes that have occurred over the past few years has led to more and more medical professionals questioning the value of the scheme. However, this is a separate conversation altogether and you should seek independent specialist advice before you make any drastic decisions.
Limited companies as a rule do normally prevent access to the scheme for an individual; this could be a deliberate pension planning exercise and could be a costly mistake if done accidentally.
The rules for those who are currently completing locum A and B forms and paying across pension contributions on your locum income, will no longer be able to do this if they incorporate. The rules for GMS/PMS and APMS contracts are different as these incomes can be pensioned, however the benefits noted above are often overturned by this approach.
As I outlined earlier, there is no black or white answer to the question as to incorporate or not. It will depend on the individual circumstances of the doctor asking the question. It is really important not to follow the crowd and instead seek specific specialist advice before you commit to making any decisions. Remember what's right for you may differ compared to another doctor.
Specialist accountant
This article has been written by Phil Harnby ACA, who is an owner and director of Mitchells Grievson Ltd, a firm of Chartered Accountants. Phil and his team specialise in the healthcare sector providing bespoke advice to GP Practice and individual Doctors. He has a wealth of experience in this field and has written many articles for the medical press and has presented at the BMA as well as other specialist national events. Phil is highly regarded by his healthcare clients for his layman explanation of often highly complex financial matters, allowing them to make informed decisions about their finances and business.
If you would like to contact Phil to discuss any issues concerning your practice, please contact 01388 662133 or email phil.harnby@mitchells-online.com