Business structures – is changing to a limited company a more tax efficient way?

Sophie Kwiatkowski explains the benefits of being a limited companyWould changing to a limited company benefit you and your business? Sophie Kwiatkowski presents some key factors for associate dentists to consider.

A question frequently asked by associate dentists is ‘should I become a limited company?’.

Sadly, there is no clear answer. Whether it is beneficial to incorporate your business or not will depend on the individual in question and his or her personal circumstances. In some cases, you could end up paying more tax by operating as a limited company.

I would always advise speaking to a dental specialist accountant and having them prepare some illustrations specific to your financial situation to determine if the change in business structure would be tax efficient.

This article will highlight the key considerations when looking at changing your business structure.

Limited company tax

  • You will pay corporation tax on your profits at 19%
  • You get a tax-free dividend of £2,000 for 2019-20
  • Any tax on dividends over £2,000 up to the basic rate band will be payable at 7.5%
  • Tax on dividends at higher rate will be payable at 32.5%
  • Any tax on dividends at the additional rate will be payable at 38.1%
  • If you wish to pay yourself a salary in the limited company, you will need to set up a payroll scheme
  • Correctly structure renumeration and avoid National Insurance
  • You have more flexibility over your personal income levels.

Key considerations

  • The NHS Pension Scheme does not allow dentists who trade through a limited company to make superannuation contributions. This could be a significant factor as employer contributions are currently 14.3% of your net pensionable pay
  • Limited companies structure so that they can use a spouse’s allowances in addition to your own. By adding your spouse as a shareholder for example, you may be able to make use of their personal allowance and their tax-free dividend amount
  • If you require most of your monthly earnings to live off, then limited companies become increasingly less beneficial. Specifically, the greatest tax savings are obtained by leaving the money in the company, as opposed to paying personal tax by drawing it out as dividends.

Don’t forget the admin

If you therefore decide the company route is right for you, there are a few administration points that are very important to ensure you are trading correctly as a limited company in the eyes of the HM Revenue and Customs.

  1. Your contract and payslips need transferring to the company name. In short, it isn’t just a case of having your income banked into a limited company bank account – the monthly schedules must be in the company name as well. If the payslips still show your personal name, you are taxed as a sole trader until changed over
  2. Everyone must be aware that you are trading as a limited company. Both suppliers and patients must be aware of your trading structure.

Remember, just because paying tax at 19% on your profits as opposed to 40% for a higher-rate tax payer might seem like an easy decision, the personal tax implications need to be fully understood before making the change in your business structure.

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