Back in 2006, the General Medical Council regulation changes resulted in many dentists opting to operate as a ‘Limited Company’.
Well over a decade on and some significant legislative changes later, is incorporation still an attractive option for dentists today?
The advantages of dentists being a limited company
1. Tax savings
The potential tax savings gained by dentists’ transferring from self-employment to a limited company is certainly the most attractive of all the benefits of incorporation.
However, remember, these potential tax savings are highly dependent on your personal circumstances, and an incorporated business will usually incur higher accountancy and administration costs.
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 2018, dividends can be paid tax-free for the first £2,000 and thereafter are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
The limited company will also pay corporation tax on its profits. This is currently 19% but is set to reduce to 17% in April 2020.
Every dentist’s situation is different and the 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 (£8,632 2019/20) 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.
However, if you have an NHS contract then please note the “permanent guarantee” policy of NHS England listed in the disadvantages section below.
3. 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 £12,500 (2019/20). From April 2016, you can also pay them up to £2,000 of dividends tax-free.
Please be aware that careful advice needs to be taken here to comply with HMRC guidelines!
4. Tax efficient life cover
As an incorporated dentist you may be eligible to take out “Relevant Life” assurance. Relevant life assurance is a tax efficient way of providing personal life cover for yourself and any other company directors or employees, such as your spouse.
Some of the benefits of relevant life cover, if set up in the correct way, are:
1. Peace of mind: Providing valuable life cover for yourself and other directors or employees.
2. Tax efficiency: The benefits are non-taxable for the director/employee and are usually paid without Inheritance tax. Also, they do not form part of the individual’s annual or lifetime allowances for pension purposes.
3. Cost efficiency: The cost of the plan is normally an allowable expense for the business, so the business will benefit from tax relief on the premiums paid.
The disadvantages of incorporating for dentists
1. Taxation on dividends
Just to confuse you, 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 £2,000).
2. NHS England incorporation policy
If you have an NHS Contract then you will need the approval of NHS England to incorporate your practice. Attitudes of NHS England local area teams do vary according to geography, however, generally NHS England policy states the following:
1. On incorporation, an efficiency review will be performed which could lead to a reduction in the UDA or UOA rate.
2. They must agree and approve any future sale of the business/sale of the limited company shares.
3. They must approve the ownership of shares in the company.
4. The provider/principal who is incorporating must permanently guarantee the performance of the NHS contract. This means they will be potentially liable to a clawback following the future sale of the practice
3. The sale of goodwill now creates a significant capital gain
A big incentive to incorporation was stopped when new legislation came into force on December 3rd, 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 tax-free.
Now, any director’s loan repayments made by dentists who incorporated after the 3rd December 2014 are no longer eligible for corporation tax relief, and additional corporation tax charge of up to 19% is payable on the goodwill value.
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 20%. As a result, goodwill is often routinely transferred at no cost, creating zero CGT.
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?
Previous 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.
Would you, as a dentist become a limited company? Or is it not for you? Let us know by leaving a comment.