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GPs' companies

Q: The question you answered about extended hours pay (GP, 6 August) mentions two partners who have private companies. How does that work?

A: Some partnerships have an agreement that if a partner does an occasional, additional session, they will be paid for it as if they were a locum instead of allocating a larger share of practice profits to them.

GPs who have earnings in addition to their practice profits would normally pay tax on this income as self-employed individuals. Setting up a limited company for these other earnings can provide some tax benefit if the GP is liable to higher (40 per cent) or additional rate (50 per cent) income tax. This is because a company pays corporation tax at 21 per cent (20 per cent from April 2011).

The company is a separate legal entity. Therefore, any income that is to be paid to it would need to be invoiced and paid into the company's bank account.

Although the corporation tax bill may be lower than that for income tax, the GP would be liable for further tax when the income is drawn out of the company - either as salary or in the form of dividends.

If a salary is taken, income tax would be payable under PAYE and the company would have to pay employer's class 1 National Insurance contributions. Therefore, dividends are the most tax-efficient way to draw income out of a company.

However, higher rate taxpayers pay a further 25 per cent tax on the net dividend, and a 50 per cent taxpayer would pay a further 36.1 per cent on it.

The benefit of a limited company, insofar as it allows for tax planning, is to separate the owners (shareholders) from the workers and plan the most tax-efficient way and time to draw out income.

The disadvantage is that there are a number of statutory responsibilities: for example, the accounts have to be prepared in a legal format and published at Companies House.

Taking professional advice first is advisable.

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