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Limited companies and your non-NHS fees

Laurence Slavin and Russell Finn weigh up the various tax and other advantages and drawbacks for GPs.

Make sure the balance of tax savings over expenses is favourable (Photograph: istock)
Make sure the balance of tax savings over expenses is favourable (Photograph: istock)

GPs with non-NHS professional earnings can save tax by operating their own limited company into which they pay this income.

But get some advice first as there are pros and cons.

Ideal situation
If a GP's spouse or civil partner has no earnings and therefore an unused lower rate tax band, you can save tax by diverting some of the private practice profits to the spouse.

But ideally the GP is a higher rate (40 per cent) or top rate (50 per cent) income tax payer, and the spouse is liable for the basic rate. However, there are still some savings to be made if the GP is faced with losing their tax-free personal allowance because they have total annual earnings between £100,000 and £112,000.

Corporation tax
If you do not need to withdraw all the profits from the limited company there can also be a saving. Corporation tax on profits is 20 per cent and further personal income tax can only arise when profits are withdrawn.

To maximise tax savings in this situation, GPs must be prepared to wait for their own tax situation to change, such as after retirement when their income has fallen. Or, say, until tax rates change.

A limited company allows you to choose how funds can be released when you decide to close it. They can be distributed as a dividend or as a capital gain, whichever achieves the greater tax saving at the time.

Limited liability
Setting up a company will provide protection compared with, say, GP partners' 'joint and several liability', as your maximum liability for debts is limited to the value of the share capital (which may only be £100 and can be as little as £1).

But setting up a company, running it and then dissolving it can be costly compared with running a small private practice separate from your NHS practice, so think longer term if you hope to save tax via a company after covering your costs.

Red tape
Running a company involves statutory requirements including filing annual accounts, completing annual returns and submitting tax returns.

All three requirements will have new and shorter deadlines compared with self-employed income. You have to be on top of the record keeping to avoid harsh penalties for missed deadlines. However, you can easily move these deadlines to a period when you are less busy by changing the company's year end.

Possible drawbacks
Including non-NHS income in your NHS practice accounts has a small effect on reducing allowable expenses when your NHS superannuable profits are calculated. By putting private practice income into a limited company, this could allow you to slip down into a lower NHS superannuation band.

Some GPs use funds generated from private fees to offset their domestic mortgage, saving as much as 5 per cent in interest payments. Money in company bank accounts cannot be used in this way. As it belongs to the company, cash would need to be drawn out as salary or a dividend.

  • Laurence Slavin and Russell Finn are client principals at specialist medical accountants Ramsay Brown & Partners, www.ramsaybrown.co.uk

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