Dental Practitioners

Is now the time to incorporate?

There are a number of strategies that can be applied to reduce your tax liability. Whilst this is dependent on income, incorporation of your practice may be one very viable strategy to adopt. 

But how do you know if incorporation is for you and what do you need to consider?

Incorporation involves selling the Goodwill of your practice to a Limited Company. Care needs to be taken when setting up the company and how Directors of the company will be paid. 

Individual companies are allowed to determine exactly how Directors are remunerated, but typically a Director (Dental Practitioner) would receive a salary, dividend payment and possibly a Director’s loan, all of which have individual tax treatment.

Salary

Directors are at liberty to determine the salary taken from the company. This could be as low as £45 per week to keep National Insurance Contributions to a minimum.

However, with many Corporate practices paying Associates salaries of £40,000 to £60,000 per annum and thereby putting them in the higher rate tax band, consideration also needs to be given to your own personal needs for a regular income. 

Dividends

Dividend payments can be taken as required providing that the company can afford to make payments. Dividends have the benefit of a 10% tax credit with an overall tax rate of 32.5% and are treated as the “top-slice” of total income. 

STOP PRESS. . . New additional higher tax rate introduced in the recent Emergency Budget is now liable to an income tax rate of 42.5%.

Director’s Loans

On incorporation, a value will be placed on Goodwill sold into the business. This figure can be deemed to be a Director’s loan and repaid to the individual without any income tax liability. The repayment of the loan needs to come from the company account - unless there is sufficient funds in the company, the loan cannot be repaid. 

We would recommend a full and independent valuation of your practice before you determine the amount of Director’s loan available.  

Goodwill Values

Corporate activity has increased Goodwill values which, at the moment, typically sit in a band between 48% and 100% of turnover. The value will be very much dependent on the mixture of NHS and Private work and the geographical location of the practice. 

Capital Gains Tax & PCT Agreement

On incorporation a Capital Gains Tax levy will be due. In the current economic climate, personal lending is very much under pressure. Lenders take a more conservative view to lending when part of the income is generated by a non-guaranteed dividend payment. This may affect your ability to borrow for a domestic mortgage where a high multiple of income is needed. 

A PCT Agreement will also be required in order to transfer an NHS contract into the name of a Limited Company.

Incorporation is not necessarily appropriate for everyone. You should always seek professional advice before implementing any significant change so do contact your L&M financial adviser who would be happy to discuss any aspect of incorporation. 

Article by Tim Haddon
Legal & Medical Independent Financial Adviser (IFA)
August 2010