If you are a self-employed locum, you may have heard other GPs talking about setting up as a limited company and wonder whether this is something you should consider. In the past GPs set up limited companies for tax reasons, however there have been several changes recently that are reducing the benefit of operating as a limited company.
What is a limited company?
A limited company is a separate legal entity and is owned by the shareholders and run by the directors. The shareholders control the company and appoint the directors. As it is a separate entity it will need to have a bank account in the name of the company.
You would be a shareholder and also a director and you can bring in your spouse/partner as a shareholder too if they are going to do some work for the company. However if your spouse only does a small amount of work for the company, the shareholdings should reflect this.
How do I pay tax as a limited company?
The company will pay corporation tax at 20% on the profit it makes. However you will have further tax to pay when you take money out of the company.
If you take dividends from the company, from April 2018 tax on the first £2,000 is at 0% and this reduces the basic rate tax band. Any further dividends are taxed depending on which income tax band you are in. A basic rate tax payer will pay 7.5%, a higher rate tax payer will pay 32.5% and an additional rate tax payer will pay 38.1%.
Pros of setting up a limited company
The personal liability of the members (shareholders/owners) is restricted to the face value of the shares they have subscribed to.
The use of the company allows for some tax planning. Directors (workers) are paid a salary (taxed at source under employment taxes) and this cost is a company expense. After all expenses (including directors salaries) the company pays corporation tax. Any residual profits can be paid out as dividends to the shareholders. If you have a spouse who is a basic rate tax payer and can do some work for the company and hold shares, you may save some tax.
Cons of setting up a limited company
You cannot contribute into the NHS Pension Scheme on locum income paid to the company, therefore will lose the pension benefit and the tax relief on this.
There may be restrictions in claiming certain expenses as the rules for claiming expenses for self-employed GPs are more relaxed. As a self-employed GP, the expenses must be wholly and exclusively for the business. However with a limited company, you are an employee so expenses claimed must be wholly, exclusively and necessary for the business.
For example, if you are self employed locum, you will claim a percentage of your actual motor costs and value of your car. As a limited company, you would have to make mileage claims using HMRC mileage rate - you would submit mileage claims and the company would reimburse this cost. If the company pays for the motor expenses, this would become a benefit in kind for you as the employee. The company would need to complete a P11D and you would need to pay tax on the benefit.
There are a number of statutory responsibilities that come with using a limited company. The accounts have to be prepared in a legal format and have to be published at Companies House, which anyone can have access to.
Since April 2017, if you fall into the IR35 legislation (see below) you will end up paying more tax and national insurance so it’s likely there will be little benefit to having a limited company.
You may have to charge VAT on your invoice if your total turnover exceeds £83,000. There was a recent case where HMRC won the argument that a doctor working through their limited company was actually supplying staff and should be VAT-registered.
IR35 – off-payroll working in the public sector
Changes to the way IR35 legislation is applied to off-payroll working in the public sector came into effect on 6 April 2017.
Each practice that you work for as a locum works for should check whether your arrangement falls within the IR35 legislation using an online HMRC tool.
The IR35 legislation was introduced in respect of individuals working via a limited company where they would have normally been an employee if they did not have the company. If you work regularly for one practice and do the same sessions every week, you are really an employee and will be caught by IR35.
If you are caught within IR35, the practice will have to pay your invoice after deducting PAYE and employee’s national insurance contributions. This is going to result in a tax credit being declared on your tax return so you are not double-taxed (remember corporation tax will be charged on your profits), although it is likely that you will be financially worse off than you were before.
What should GP locums do to ensure they do not fall within IR35?
- Do not work for one practice ‘regularly’
- You have to use a substitute should you be unwilling to make the session. A substitute GP should be able to provide the same services originally offered by you. This substitute cannot be someone who regularly works for the same practice you work at. The practice will then pay your company and you will, in turn, pay the substitute for doing the shift for them.
- Do not take advantage of any employment benefits from practices you work for, for example sick pay, holiday pay, staff away days, etc
It is advisable that you seek advice from an accountant before you set up a limited company.
- Jenny Stone is a partner at specialist medical accountants Ramsay Brown and Partners