It’s Tuesday! Let’s talk Tax. Read this week’s short tax snippet for Doctors & Dentists, to help you save money and get more organised with your tax affairs. It’s just to give you a flavour – take 5 minutes to have a read.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. The Financial Conduct Authority does not regulate tax advice.
What is incorporation?
If you are not familiar with the term, “incorporation” means to operate your business using a limited company structure. This is opposed to acting as a sole trader (self-employed) or a partnership.
Historically, there were significant tax advantages of incorporation for your dental or medical practice.
Whilst some of these have been mitigated by new legislation, there are still some practical benefits to using a limited company to trade, as well as some potential tax benefits that come with careful tax planning.
Tax benefits of incorporation
Until April 2016, it was viable to see tax slashed from 45 percent to just 20 percent by switching from a sole trader or partnership to a limited company. This was due to the low rate of tax on dividends that made it possible to draw money from a company tax-efficiently.
In April 2016, the dividend tax rose by 7.5% across each bracket, see chart below.
Tax band | Before April 2016 | After April 2016 |
---|---|---|
Basic rate | 0% | 7.5% |
Higher rate | 25% | 32.5% |
Top rate | 30.56% | 38.6% |
Subsequently, doctors and dentists that draw a minimum salary of approximately £11,000 and receive dividends to the top of the basic rate tax band, will now be paying an additional £2,000 a year in tax, due to the new legislation.
Typically though, doctors and dentists draw more than this, so will be finding steeper hikes in their dividend tax in 2017 and future years.
This change has virtually wiped out the tax benefits of incorporation if you want to draw all the money from the company.
Read more: Is it still better for tax to be a limited company?
Remaining benefits of incorporation
It can still be viewed as beneficial to incorporate your dental or medical business for other reasons.
As a limited company it means you, personally, have a limited liability to the success of your business; it keeps you one step removed so your personal assets are generally more secure. However, banks usually do require some form of personal guarantor these days too when lending money to a company.
Suppliers and patients may also view your business as being more prestigious and successful if it is a limited company.
Dividends still don’t attract the same National Insurance costs that drawing a salary does, so this needs to be taken into account when comparing salaried roles.
Read more: How the new dividend rules will affect you?
Tax advice on incorporation
Following the dividend tax changes, the main point is that is wasn’t as straightforward as before in terms of making a decision.
The tax bill isn’t likely to be any higher trading as a limited company compared to a sole trader, but a company does cost more to run.
Accountancy fees are higher and invariably there are more rules and regulations to abide by, that takes time and resources.
It is a case of weighing everything up very carefully in line with your longer-term objectives too.
Next steps: A specialist accountant can help with an Incorporation Review.
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