Since the General Medical Council regulation changes of 2006, many dentists have opted to operate as a ‘Limited Company’.
8+ years on and some significant legislative changes later, is incorporation still an attractive option for dentists today?
The advantages of being a limited company for dentists
1. Tax savings
The tax savings gained by dentists’ transferring from self-employment to a limited company is certainly the most attractive of all the benefits of incorporation. But remember, these potential tax savings are highly dependent on your personal circumstances.
Income tax savings
Directors of a limited company draw income through a combination of salary and dividends. For dentists paying 40% tax, this fact alone could reduce the amount of tax you have to pay if you were a limited company.
As of April 2016, dividends can be paid tax free for the first £5,000 and thereafter are taxed at 7.5% for basic rate tax payers, 32.5% for higher rate tax payers, and 38.1% for additional rate tax payers.
The limited company will also pay corporation tax on its profits. This is currently 20% but is set to reduce to 19% in April 2017 and 18% in April 2020.
Every dentist’s situation is different and the recent changes to dividend taxation don’t suit everyone…see the disadvantages list below! Your accountant is best placed to balance these differing tax rates and decide on the best route for you.
National insurance savings
All NI contributions can be avoided by incorporating. As a limited company, you can take a small salary up to the threshold at which NI is payable (£8,060 2015/16) and then take the balance of post-tax profit as dividends.
2. Protecting your personal assets
As a limited company, should your dental practice run into financial difficulty, your personal assets will be protected from any future liability. While banks may require personal guarantees for borrowings, there will be limited liability to other creditors.
3. Succession planning and dental practice sale
When a limited company is sold, the assets of the company remain in situ. For limited dental practices, this may include vital elements such as the Primary Care Trust (PCT) contract, as well as more basic elements such as company bank accounts.
With these assets in place, an incorporated dental practice can be more attractive to prospective purchasers. Based on anecdotal indications from our dental clients, limited dental practices also often realise higher selling values.
4. Maximising your spouse’s tax allowances
You can appoint a non-earning spouse as a shareholder to receive both income and dividends. If they do not work or earn an income, you can pay your shareholding spouse a salary up to their tax-free personal allowance of £10,600 (2015/16). From April 2016, you can also pay them up to £5,000 of dividends tax free.
Do note though that careful advice needs to be taken here to comply with HMRC guidelines!
The disadvantages of incorporating for dentists
1. Taxation on dividends
Confusingly, taxation on dividends makes an appearance on both the advantages and disadvantages lists!
Abolition of the tax credit on dividends has led to an extra income tax charge on dividend income taken from limited companies (excluding the first £5,000).
2. The sale of goodwill now creates a significant capital gain
A big incentive to incorporation was stopped when new legislation came into force on the 3rd December 2014. Before this date, goodwill (often 100% of contract value) could be bought using a director’s loan. The loan could be repaid by the company whenever it was affordable to do so, and the proceeds paid were free of all tax.
Now, any director’s loan repayments made by dentists who incorporated after the 3rd December 2014 are no longer eligible for corporation tax relief.
Sale of goodwill on incorporation also used to receive entrepreneurs relief and was taxed at 10%. This too is no longer the case. Any sale of goodwill to the limited company now attracts full capital gains tax (CGT) at 28%. As a result, goodwill is often routinely transferred at no cost, creating zero CGT.
3. Renegotiation of UDA contract rate
Many PCTs use the change in a dentist’s status as a ‘suitable event’ to renegotiate the units of dental activity (UDA) contract rate, and often seek to make savings by UDA rate reduction.
This obviously has implications for income and resale values. It can also result in additional legal costs for a smooth transfer of ownership to the new company.
4. Implications for personal borrowing
All lenders adopt different rules and criteria for lending but some lenders may be less generous when it comes to lending based on dividend income.
This could have a significant impact on your personal goals and aspirations, particularly if you want to move to the house of your dreams at some point in the future.
5. NHS Pension membership and benefits
- The NHS Pension Scheme does not allow ‘Performers’ (Dental Associates) who operate as a limited company to be members; plus
- ‘Providers’ (Principals) are only able to make NHS Pension contributions equivalent to their salary and dividend payments.
Whilst the NHS Pension Scheme changes have affected the benefits NHS dentists receive, being a member of the Scheme is still a valuable asset to have; getting the same benefits on a ‘private’ basis is expensive.
So should a self-employed dentist become a limited company?
Recent legislative and NHS Pension changes make the decision to incorporate less clear cut than ever.
Is it right for you? The answer very much depends on your individual circumstances. Dentists considering incorporation need to look at many factors, including their:
- Current personal and business situation;
- Future business development plans;
- Personal lifestyle plans.
If you’re thinking about incorporating, we suggest you get advice from both your accountant and a specialist financial adviser so that all aspects of your personal life and your business are considered in detail, and on their own merits.
Are you a dentist considering incorporation? What are the main reasons why you would / would not become a limited company? Let us know by leaving a comment.