better to be taxed as an individual or via a Ltd company?

My partner is an NHS consultant, paying tax at the 40% rate. They are shortly due to start working for a private clinic too. I am aware that many of her colleagues have themselves set up as a Limited Company and their private earnings are paid to the company rather than them as an individual, so I am wondering if an arrangement of this sort would be the right thing for my partner to do.

If she just takes her private income (less any deductible costs) as an individual then she'll pay 40% tax on it via self-assessment. Whereas via a Ltd company, the company would pay 25% corporation tax on profits and then any retained earnings extracted via dividend > £1,000 would be taxed at 33.75%, which would be a combined overall tax rate of more than 40%.

If you also factor in the admin and cost of setting up and maintaining a Ltd company, I am not sure why people do it that way?

Am I missing any potential benefits or circumstances in which it would be more tax efficient to use a Ltd Company? is there anything else that we should consider when making this decision?


Comments

  • There are lots of different reasons, previous years Corporation tax was 19% not 25% (although there is a marginal rate) and there was also a £5k tax free dividend allowance. Other costs are also allowable in an Ltd where as they are not tax deductible for a PAYE. It may also be easier to work in various private practices as an Ltd than as an individual with multiple PAYE incomes, and of course there is the benefit of limited liability, although I do not know how that specifically relates to medical services. The efficiency of paying via an Ltd has certainly decreased in recent years, however there are other benefits.

    A primary earners partner can be either employed, or a shareholder of the Ltd, they might be a lower rate taxpayer so better than the higher earner paying 40/45% tax. You are also basing it on them taking the entire amount every year, many will retain profit for future years when they earn less, due to reducing hours/retiring, so not paying higher or additional rate tax.
  • thanks for the reply.
    what sorts of costs are allowable for a Ltd but not for self-assessment? she'll be working for a 3rd party who own the building and other related facilities, so related costs will be relatively low
    the partner point isn't an option unfortunately as I am also a higher rate tax payer too.
    understand the point about retaining the profits into the future but she's only 39 so it would be 15+ years probably before she starts to wind down far enough to be a basic rate tax payer and don't think we'd want to wait that long to access
  • DullGreyGuy
    DullGreyGuy Posts: 9,029
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    what sorts of costs are allowable for a Ltd but not for self-assessment? 
    The comparison was against PAYE (eg if you used an Umbrella or were directly employed) not a Sole Trader (which I think you mean by "self assessment")
  • yes i understand, thanks. to clarify, she will not be an employee, the choice is between sole trader and Ltd. In which case i think the rules about allowable costs are basically the same?
  • DullGreyGuy
    DullGreyGuy Posts: 9,029
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    yes i understand, thanks. to clarify, she will not be an employee, the choice is between sole trader and Ltd. In which case i think the rules about allowable costs are basically the same?
    There are some minor differences like the company can buy a mobile phone or computer and give it to its employees for both business and personal use without attracting BIK whereas a sole trader should only account for the proportion of the bill that is for business use. 

    As a company however you have to use accrual accounting whereas a sole trader has the choice of cash or accrual accounting. For a doctor there probably isnt much difference but if you were having to buy a load of stock then there are material differences between the two and many would prefer cash accounting. 
  • uknick
    uknick Posts: 1,602
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    Don't forget about IR35 if she's contracting through a Ltd.  If she's contracting for nobody else she may run the risk of falling foul of IR35 and the associated tax issues.  It might be worth doing the HMRC online test.

    If she a sole trader IR35 not a problem, but as you've said very few advantages in being a sole trader. 
  • Grumpy_chap
    Grumpy_chap Posts: 14,380
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    My partner is an NHS consultant, paying tax at the 40% rate. They are shortly due to start working for a private clinic too. I am aware that many of her colleagues have themselves set up as a Limited Company and their private earnings are paid to the company rather than them as an individual, so I am wondering if an arrangement of this sort would be the right thing for my partner to do.

    If she just takes her private income (less any deductible costs) as an individual then she'll pay 40% tax on it via self-assessment. Whereas via a Ltd company, the company would pay 25% corporation tax on profits and then any retained earnings extracted via dividend > £1,000 would be taxed at 33.75%, which would be a combined overall tax rate of more than 40%.

    If you also factor in the admin and cost of setting up and maintaining a Ltd company, I am not sure why people do it that way?

    Am I missing any potential benefits or circumstances in which it would be more tax efficient to use a Ltd Company? is there anything else that we should consider when making this decision?


    Corporation tax is still 19% is profits are under £50k.
    There is a lot of flexibility on making company pension contributions through Ltd.
    There is the scope to time withdrawals from the Ltd Co. to make best use of available tax allowances and bands.  For example, if earnings this year already place the individual in higher rate tax, then dividends could be drawn next tax year when earnings could be in basic rate band.
    It is probably worth engaging the services of an Accountant who can properly assess all options in the full knowledge of everything, which we don't have from limited comments in this thread.
  • Basic rule of thumb is that a LTD company may be more tax efficient if she doesn't need to take most/all of the earnings out. Roughly cost equal if withdrawing earnings as salary/dividends once additional accountancy costs of LTD company are taken into account 

    Many doctors use LTD as bridge to fund early retirement while waiting on NHS pension

    There are few additional expenses that a LTD company offers beyond that which can be claimed as a sole trader with exception of a new electric car 

    A limited company does offer the potential benefit of avoiding AA charges if combined income is >200k

    I'm an NHS consultant with a modest private practice and still opt for sole-trader route for private work

    Doctors.net forums is a useful additional resource. Medics money podcasts are a bit basic in places but there a few detailed episodes on pros/cons of LTD company route
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