As an associate dentist, you will need to choose between self-employment and forming a company. The practice you work for will not advise you. No tax or national insurance is deducted from your payments. You have to arrange all of your own finances to pay the right amount of right tax. There are a number of ways you can do this, and the amount of tax and national insurance will be different for each one:
- Register as self-employed.
- Set up a company which you own and control
- Set up a partnership with one or more other people.
You can save tax by using the one most suitable for your circumstances.
The simplest and most obvious way route is to register with HMRC as self-employed. Each year, you’ll need to complete a tax return with all your income and expenses for the year.
- Simpler accounts and lower accountancy costs
- One tax return a year
- If you work in the NHS, you can join the NHS pension
- Use the cash scheme, so pay some tax later
- Your business details and accounts aren’t made public on Companies House website
- You have to make tax payments on account, so pay tax earlier
- Your first tax payment is high because you pay 18 months of tax
- Much less flexible for tax savings
- 62% tax rate on income between £100,000 and £125,000.
- Can’t share profits with your spouse
An example of someone more suited to being self-employed would be where your income is under £100,000, you don’t have a spouse/partner to share your income with, or any children, and you spend most of your income each year.
A partnership is generally unsuitable for an associate dentist. This is because GDC rules mean that, unlike a company, each partner must be GDC registered. If you were thinking of involving your spouse, they would need to be GDC registered too.
However, this can be the case for some associate dentists. A partnership is two or more self-employed people running a business together. You need to complete a partnership tax return in addition to a self-assessment tax return for each partner.
It has similar advantages to being self-employed, plus
- You can share profits with a spouse to use their lower tax rates and allowances
Disadvantages include those for self-employed, and also
- Need two additional tax returns – a self-assessment return for your spouse and a partnership tax return
- All partners need to be GDC registered
Limited liability partnership
Similar to a partnership, but the “limited liability” means that you personally are not liable for the debts of the business.
However, the disadvantages would be
- Your accounts and business details are available from Companies House to the public
- The accounts are more complex and will cost more
- Can’t use the cash scheme
A limited company is a legal body that is separate from you, its owner. Therefore, you get the benefit of limited liability, meaning you are normally not personally liable for any financial losses made by the company.
The main reason for an associate dentist to set up a company is to save tax.
The tax rates for companies and self-employed individuals are quite different. A self-employed person pays tax and national insurance, which together give a rate of between 0% and 62% for different bands of income. A company pays tax at 19% for all profits and no national insurance. Additionally, you’ll pay additional tax to withdraw money from the company for you personally, but you can choose when and how much to withdraw.
- Corporation tax rate is lower than personal tax rates
- No national insurance on company profits
- More expenses can be claimed against tax
- You can have other people who are not GDC registered involved as shareholders or directors – which means you can pay them a salary and dividends and save tax
- Tax planning opportunities by taking loans, salary and dividends from the company in different tax years.
- Keep your child benefit by taking less cash from the company
- You pay additional tax when you take money from the company for yourself
- Can’t have an NHS pension
- More complicated accounts, tax returns and admin, which will cost more
- There are multiple tax returns to prepare – a corporation tax return for the company, a self-assessment tax return for you personally and potentially one for your spouse as well
- You need to check if your practice will pay a limited company instead of an individual
It’s the flexibility of a company that can really help you to organise your tax and finances. We have a more detailed guide on the various ways that a company can save you tax – you can download it here.
An example of someone more suited to having a company would be if your income after expenses is over £50,000 and you have a spouse/partner to share income with.
A company is not suitable for everyone. Consequently, its worth talking to an adviser to work out which option is best for you.
Combination of NHS and private income
If you have a combination of NHS and private income, then you can be self-employed for your NHS income and a have a limited company for your private income. It makes your accounts a bit more complicated, but can save a significant amount of tax and keep your NHS pension and rights.