Should I consider Incorporation as an Associate?

We get it — you want to pay as little tax as possible. Conversations in the staff room with colleagues may convince you that incorporating your associate business into a limited company is the solution to saving those hard-earned pennies.

What we want you to do is take a step back and really consider whether this decision is the right move for you — and future you.

Let’s start with the benefits. Corporation tax is charged at 25%, with potential marginal relief for companies whose profits are below £250,000. Sole trader income is taxed at 20% (basic rate), 40% (higher rate), and 45% (additional rate). As a sole trader, you will also be subject to national insurance contributions on your self-employed profits.

There is limited liability should your business run into financial difficulty — only the company’s assets are at risk. A sole trader in a similar position could be putting personal assets at risk, with no legal separation between them and their business.

For higher and additional rate taxpayers, this might seem like a straightforward decision. How could incorporating not be the move for self-employed dentists?

Like most things, trading through a limited company comes with its disadvantages.

The company will pay corporation tax ranging from 19% to 25%, depending on profit levels. It’s important to understand that profits in the company are not yours — they belong to the company. As a result, you’ll pay personal tax on any money you withdraw for personal use.

That said, drawings from the company attract a lower rate of personal tax, subject to dividend income rates. Currently, dividend income is not subject to national insurance contributions, and all taxpayers receive the first £500 of dividend income tax-free.

You cannot remain enrolled in the NHS pension scheme (including death in service benefits) if you are trading as a limited company.

In this instance, setting up a private pension with a member of our wealth management team would be one way to keep your retirement fund intact — and it can even save you corporation tax!

HMRC requires greater financial detail and reporting for limited company accounts. This means higher accountancy fees and more administrative tasks. The limited company will need its own bank account, name, tax deadline, and Unique Taxpayer Reference number.

After incorporating, you’re trading under a new legal entity, and all documents related to your work should reflect this. The name on your contracts and payslips should now be that of the company, with payments made into your company’s bank account. Any payslip addressed to you personally may be viewed by HMRC as a ‘flawed incorporation’, meaning the income could be taxed as sole trader income instead.

Please raise this with your practice before making a decision on incorporation. We’ve seen practices refuse to recognise a dentist as a limited company — whether due to administrative constraints or unfamiliarity with the process.

A limited company, by nature, makes it harder to access profits for personal spending. Two common methods of extracting profits are through salary or dividends. The company can pay you a salary, providing monthly income and attracting corporation tax relief. A dividend can be voted to offset against personal drawings taken from the company.

The level of dividend voted depends on the cumulative post-tax profits available for distribution. This can leave an individual in a position where they’ve taken out more money than they’re entitled to, triggering HMRC to charge S455 tax at 33.75% on the outstanding balance owed to the company. These balances can be cleared via dividends or by transferring the cash back into the company account.

Tax savings on your profits can be a great benefit. However, a common pitfall is that an individual’s personal financial commitments can result in personal tax liabilities that wipe out any savings made. It’s rarely tax-efficient to withdraw all your profits from a company each year for personal use.

A limited company can be a great vehicle to retain cash for a future investment such as a dental practice deposit. However, your future financial demands may mean a limited company isn’t the best option — and closing a limited company can have further tax consequences.

With all that said, everyone’s situation is different, and there is no one-size-fits-all answer. That’s why we strongly recommend getting in touch with us. Our knowledgeable team will help guide you through this important decision