Are you thinking about starting a Limited Company for your Locum work?

The single most common question I get asked from my clients is whether or not they should incorporate their locum / medical business.  

When I get asked this, tax is the driving force of the decision almost every time, however all too often I find medics have been ill informed about the consequences.

I believe all good professional relationships start from a position of trust, so I have written this as an honest review of incorporation from a medical accountant's perspective in a no-nonsense, jargon-free and comprehensible manner.     

What follows is not intended to be taken as full and complete advice; that would be impossible due to everyone’s uniquefinancial financial circumstances, goals andneeds.  However if you’re reading this you are very likely to benefit from the services of an accountant and I would urge you to contact me to discuss your goals. I don’t charge for the initial consultation and as many would verify, a good accountant pays for itself…so pick up the phone / send me a WhatsApp / drop me a DM / pop across an email and let’s start the conversation!   

What is incorporation and who is it for? 

For newcomers to the financial world, ‘incorporation’ is when you operate your business via a limited company rather than as self-employed.

A key point for GP Locums is you cannot pension your locum work under the NHS Pension scheme if you operate via a limited company. For many, this is where the conversation stops. If, however, this doesn’t put you off, please read on!

I want to dispel the seemingly popular myth that limited companies are a sure fire tax saving vehicle for all. If that were true, the government would be doing an almighty disservice having such an unequitable tax system! Don’t get me wrong though, there remain instances where savings can be made and I’ve detailed below some good examples of them. However in the current tax climate, the tax benefits are fewer and further between than they have been in recent years and increasing anti-avoidance legislation is an ever growing deterrent to exploiting them.

As noted above, there is never a one-size-fits-all approach to the question of incorporation. Even two colleagues with the same jobs / similar incomes will still have unique circumstances whereby operating through a limited company may be suitable for one, but not the other.   

How is a limited company different fromself-employment?

A limited company is a separate, distinct legal entity. It is a unit in its own right, separate to both those that run it, i.e. the directors, and those that own it, i.e. the shareholders. Directors can be shareholders and vice-versa.

A limited company pays corpora􀆟on tax on its profits; the current rate is 19%. Income tax, conversely, ranges from 20% and 45% subject to the level of your income. In addition, there are some punitive income brackets where the effective rate of income tax is 60% due to the clawback of other reliefs and benefits. For example, the personal tax free allowance is gradually lost when income exceeds £100,000 and child benefit is clawed back when income exceeds £50,000. Here is one area where incorporation can help; please see further below.

One of the key things to remember is that cash within the company does not directly belong to the directors or shareholders and there are tax consequences of extracting it. Cash can be extracted by way of salary, dividends, pension contribu􀆟ons and provision of benefits, e.g. cars.

Before I discuss the tax, I want to highlight the other key aspects of companies:

• Companies come with significant administrative duties. As a minimum, these include statutory accounts, a corporation tax return and annual forms for Companies House. This makes them expensive to maintain by way of accountancy costs. While you may choose not to engage an accountant, for many, a good accountant represents excellent value for money; not only maximising tax savings but removing much of your admin burden and helping reduce stress and anxiety in dealing with Companies House and HMRC.
• Information concerning the company is publicly available, including some company finances and personal information about the directors.
• A company provides the owners with limited liability. This means that you aren't liable for the debts of the company but you would still require professional indemnity insurance.
• Directors have several statutory duties and must maintain adequate records to evidence their compliance. Generally being organised and orderly is a must – for this reason alone it may not be for everyone!

Before moving on to where the tax benefits of a company arise, I want to outline where they definitely do not! After the issue with the NHS pension noted above, the following is usually the second practicality that deters many of my clients...

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