by Laurence Slavin, Partner
Last week I visited a client who had attended a course in London last year in which the speaker, an accountant, asked the audience why they were not all practicing through companies, and paying just 19% corporation tax. The audience were sold, and my client was irritated. Why hadn’t I told him about the merits of companies?
Well the truth is that the audience were told half the story. Yes, corporation tax is just 19%, but assuming the GP needs access to his earnings, there is tax to pay on withdrawing the money from the company. Salaries don’t work, as if the salary exceeds the lower NI earnings limit (less than £10k) the company has to pay employers NIC – around 12% on the salary. So that is corporation tax of 19%, tax on the salary at 40% and employers NIC of some 12%.
Dividends? Well the tax regime changed a few years ago. A 40% taxpayer has to pay 32.5% tax on dividends, after paying 19% corporation tax, so that means 51.5% against 40% if the tax was declared by the GP directly.
Does this mean that companies are not necessarily the best option for GPs? Almost certainly. Why are so many locums working through companies? They almost certainly should not.
Are there circumstances in which companies are a good idea? – yes, they tend to be effective where the funds can just stay in the company after the 19% tax is paid, and the GP doesn’t need the funds. Eventually when there is a sufficiently large fund, the company could be liquidated at capital gains tax rates.
So I leave my client better informed, he abandons the idea of a company.
This article was written by Laurence Slavin, a partner at Ramsay Brown who specialises in the finances of Primary Care and GPs. He can be contacted at firstname.lastname@example.org or 020 8370 7710