Use limited company to save on tax

GPs could boost their take-home pay by up to £13,000 per partner by forming limited companies to run their practices, accountants say.

A change in NHS pension rules at the start of the 2006/7 financial year means GPs can benefit from tax breaks available to companies, but retain their NHS pension.

Specialist medical accountant Paul Kendall, of Dodd and Co, said the NHS Pensions Agency (NHSPA) had changed the rules to make sure GPs did not avoid paying superannuation on some parts of their income by diverting it into limited companies.

An NHSPA adviser said earlier this year in a letter to Mr Kendall that the DoH had confirmed the rule change.

It said: ‘For 2005/6 I can confirm that dividends are not pensionable, however, the DoH has confirmed that from April 2006 dividends are pensionable subject to them being in respect of GP NHS work.’

Mr Kendall said: ‘In the past we have used companies to re-route excess income into private pension or savings schemes. But now GPs can use companies to save tax.’

Companies pay tax at a rate lower than income tax, he explained. GPs could also make spouses partners in their company. This would generate additional savings by paying out some of their profit to their spouse as dividends.

The benefits are greatest for small practices, he said. But large practices can also use the same technique to generate additional savings. Mr Kendall explained that a single-handed practice that he represents with profits of £132,765 ended up with £84,543 after tax and national insurance contributions under the current system.

If, however, it became a limited company, with profits and dividends shared equally between a GP and his or her spouse, the practice would have £97,616 after paying tax and national insurance. That is a gain of more than £13,000.

‘I think many GPs will go for this,’ Mr Kendall said. ‘In the past practices have had companies on the side to do insurance reports and other non-NHS work, but now they can expand the income going through those to maximise the tax breaks.’

A three-partner practice with £400,000 profits would see a saving of £2,672 per partner from incorporation.

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