Limited company tax planning
Recently it appears that limited companies have taken a bit of a hit in terms of tax benefits, however, are there still opportunities for doctors and dentists by trading as a limited company? Michael Lansdell, from Lansdell & Rose medical and dental specialist accountants discusses the current tax situation.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
The hay days are gone
Certainly, gone are the incorporation hay-days, which started in 2006 when legislation allowed healthcare professionals to trade as a limited company, offering significant tax perks, low income tax rates and a tax-efficient means to extract profit in the form of dividends.
For those who are already incorporated, it is likely that you will still be reaping savings compared to paying tax under self-assessment.
For those who were planning to incorporate in the future, you may have missed the boat with some of the tax benefits, however, ongoing tax savings may still be available, depending on your circumstances – timing will be the key.
“As specialist tax advisers to doctors and dentists for over 20 years, we have seen all peaks and troughs of the incorporation “wave” and we think, it isn’t time to despair yet.” Michael Lansdell, Landsell & Rose
Incorporation is less attractive – but it is still attractive
It is useful for comparison purposes to understand the changing tax systems around incorporation.
A hefty CGT bill and no director’s loan
The amendments to Capital Gains Tax (CGT) legislation in December 2014, means that when transferring a business from an individual or partnership to a limited company, the “sale” of the goodwill is effectively no longer as attractive.
There is now a 28% CGT implication, compared to 10% when able to utilise the Entrepreneurs Relief. To this extent, often the goodwill is transferred at a value as close to zero as possible, to avoid a hefty CGT bill for the business owner. Again though, it depends on the size of your practice and your long-term goals.
As a second incentive on a business transfer, the company could use a “director’s loan” to purchase the goodwill from the sole trader or partnership, effectively creating a fund for the new director/s to draw from, tax-free. This also is a benefit that was washed away with the recent changes.
Increase in dividend tax
The most recent news, feeling to many like another attack on limited companies, is the change to dividend tax rates.
From April 2016, the tax credit will be removed and even basic rate taxpayers will have to fork out 7.5% on all dividends drawn, after a new £5,000 tax-free amount.
It affects higher rate and top rate taxpayers too, whose rates have increased to 32.5% and 38.1%; basically an additional 7.5% all round.
Although to those who’s pockets will be affected, this seems like a drastic measure, it is really just making the prospect of incorporation less attractive – but it is still attractive.
The remaining benefits of incorporation
On the plus side, corporation tax remains at the low rate of 20% and forecasts predict by 2020 it will be 18%.
Incorporating your business means that you have a “limited” liability should problems arise, which gives you some peace of mind when trading in this manner, as your personal assets are protected.
Many professionals, in fact, will only do business, with limited companies, so this can help when negotiating credit terms with suppliers. Similarly, whilst it isn’t guaranteed, the fact that your company is a separate entity can help when trying to raise business finance.
There continues to be a National Insurance (NI) saving as self-employed professionals are subject to pay NI. Taking a small salary from the company, below the NI threshold, can eliminate NI.
Opportunities are more prevalent in a limited company structure to employ a non-earning spouse as a shareholder, who can take a salary up to their personal allowance threshold. From April 2016, they can also take a £5,000 dividend, tax-free – although advice is required here to ensure you are compliant.
Is incorporation still viable for you?
As the decision to incorporate is less clear-cut that it once was, it is essential to take advice around the timing of such a key business decision.
Incorporation itself will incur some costs, but the ongoing maintenance of the limited company also needs to be taken into account, as does NHS pension schemes and UDA contract rates for dentists.
A professional tax adviser will look at the following:
- Your current personal and business situation
- Your future business development plans
- Your personal lifestyle, including income requirements
Start today – Contact the team at Lansdell & Rose to be sent a link for your free consultancy session. Or visit our website for more details.
Read more tax saving tips from Michael
- Inheritance Tax Update
- 7 great KPI’s to track financial performance
- How financial forecasting can save you tax
Dental & Medical Financial Services work alongside many other healthcare specialists to give you access to the best advice. Please call our team today to get connected.
Tel: 01403 780 770