A more favourable tax regime is in place for companies when compared to partnerships and sole traders which are unincorporated businesses. So, for the same level of profit the owners of a company will have more cash available to them after paying their tax bill than those of a partnership.
Currently 99% of NHS practices in the UK are set up as partnerships. That means they are not making the most of the tax regime the UK has in place for companies and so, potentially, are missing out on savings.
There is an argument for GP practices to set up a company and so minimise tax bills. This is what you need to know:
1. By incorporating the whole practice, the business ceases to be run as a partnership and instead is run via a limited company. This won’t work for GMS or PMS practices as it could result in their contract being put out to tender.
2. It could make financial sense to set up a limited company just for non-NHS income, particularly if this income adds up to a significant amount. When a business is operated as a company, corporation tax becomes relevant. The reason why companies are better for tax purposes, even taking into account corporation tax, is that the reduction in income tax and national insurance for the ‘owners’ of the company more than outweighs the corporation tax liability.
3. In a limited company the directors are employees who receive a salary; the shareholders are the owners and receive dividends. Dividends are not subject to national insurance. At the same time, the income tax rate that applies to dividends is also lower than the rate a GP partner is likely to be liable for on their profit share. In small companies the directors and shareholders are often the same people but it’s worth bearing in mind that the tax savings are enhanced where the shareholders are basic rate taxpayers. A basic rate taxpayer won’t pay income tax on dividends paid by the company they own shares in.
4. Making family members, who pay no more than basic rate tax, shareholders in the company is generally a good idea but can be complicated so worth discussing with us.
5. The impact on NHS pensions will be minimal as non-NHS income is not superannuable in the NHS pension scheme.
6. Limited company administration needs to be well organised with invoices sent out regularly, dividends declared before being paid, dividend vouchers prepared and minutes of board meetings drawn up.
7. Ideally, your company’s financial year end should coincide with your practice’s so your income tax year is aligned with your company’s corporate tax year.
8. Corporation tax on the profits of 20% on the first £300,000 is payable nine months and a day after the company’s year end and there are legal requirements for submitting information to Companies House annually.
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Please contact: Ken Craig on 01733 568321 or email@example.com