As an associate dentist, you will need to choose between being self-employed and forming a limited company. No tax or national insurance is deducted from your payments, so 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 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 the 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.
GDC rules mean any partner in a dental partnership must be GDC registered. If you’re thinking of involving your spouse as a business partner this rule makes a partnership generally unsuitable for an associate dentist if your partner doesn’t hold a dental qualificatiuon.
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 “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 tax to withdraw money from the company for you personally, but you can choose when and how much to withdraw.
- If set up and managed well, you can save a significant amount of tax:
- Corporation tax rates are lower than personal tax rates
- Unlike self-employment, there are no national insurance on company profits or tax payments on account to make
- Extra tax relief for research and development expenditure – good if you have an idea for a product or technology you could develop an income from
- Tax-efficient to own or lease electric cars, vans and bikes
- Tax deductions for interest charges paid on loans you make to a company – depending on your other income you can pay no income tax when you are paid the interest
- 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
- Directors and secretaries accrue full national insurance benefits and a state pension without paying any national insurance contributions
- Tax-free gifts and parties for the directors and any employees
- Tax planning opportunities by taking loans, salary and dividends from the company in different tax years
- Tax deduction for your relevant life assurance payments and a tax-free payout to your estate
- From April 2021, super deductions to save more tax on equipment purchases
- Keep your child benefit by taking less cash from the company
Read our article here for examples of how much tax you could save
- You have a double taxable. First within the company on the profits and secondly when you withdraw them. This can lead to surplus cash balances within the company that becomes expensive to withdraw
- Can’t have an NHS pension
- More complicated accounts, tax returns and admin, which will cost more
- There are payroll returns to administer and 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 allow a limited company to operate under an associates agreement
- Benefit in kind reporting known as P11ds – meaning you could have to pay income tax and company national insurance when expenditure is not exclusively for business use. E.g. when you use a company car for private journeys
- Information about your company is publically available at Companies House
- You need to appoint an insolvency practitioner (they are expensive) to close a company if the company has assets over £25,000 and you wanted to pay tax at 10% on the gains
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, it’s 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, you can be self-employed for your NHS income and 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.