Under the UK tax system companies are subject to a more favourable tax regime compared to partnerships and sole traders which are unincorporated businesses.
For the same level of profit the owners of a company will have more after-tax cash available to them than a partnership.
With this in mind how can GPs make use of the tax regime for companies, when 99% of all NHS practices in the UK are partnerships, and are therefore potentially missing out on these savings?
One option is to incorporate the whole practice, so that the business ceases to be run as a partnership but instead is run via a limited company. This is not recommended for GMS or PMS practices because, as a company is a different legal entity from a partnership or sole trader, it could result in their contract being put out to tender.
However it may make financial sense to set up a limited company solely for your practice’s non-NHS income, particularly if this income is significant. With a company, a different tax – corporation tax – is introduced into the mix.
The reason why companies are better for tax purposes, even with an additional tax to consider, is that the reduction in income tax and national insurance for the ‘owners’ of the company, more than outweighs the corporation tax liability.
In a limited company, the directors are employees who receive a salary; the shareholders are the ‘owners’ and receive dividends.
Dividends are not subject to national insurance and the income tax rate that applies to dividends is also lower than the rate a GP partner is likely to be liable for on their profit share.
In small companies the directors and shareholders are often the same people. However, the tax savings are enhanced where the shareholders are basic rate taxpayers.
If a shareholder who is a basic rate taxpayer receives a dividend from the company they own shares in, they will not pay any income tax on it.
Therefore as well as the GP principals being shareholders in a company into which non-NHS income is paid, it is a good move to make family members (who pay no more than basic rate) shareholders. This is a however a complicated area and you should speak to your accountant for more details.
As far as the GP prinicipals’ NHS pensions are concerned, the impact on them should be minimal as non-NHS income is not superannuable in the NHS Pension scheme.
Limited company administration needs to be well organised. It includes:
- Sending out invoices regularly
- Making sure dividends are ‘declared’ before paying them to the shareholders.
- Preparing dividend vouchers
- Drawing up minutes of board meetings.
Financial year end
A company pays corporation tax on the profits of, currently, 20% on the first £300,000 nine months and a day after the company’s year end and there are also legal requirements for submitting information – which will then be available to the public – to Companies House each year.
When choosing your company’s financial year end, it often makes sense to make it the same as your practice’s year end – especially if this is 31 March – as your ‘income tax year’ will then be aligned with your company’s ‘corporation tax year’.
That way you do not have to worry about collecting dividend information from two different sets of company accounts for one year’s income tax return.