Associate Dentists & Incorporation

Most of the enquiries we receive from existing and prospective clients will involve discussion about incorporation of their Associate activity. Incorporation can prove to be very tax efficient however, the level of efficiency will be dependent upon several factors:

Nature of clinical activities, i.e. NHS, Private or Mixed

If you are predominantly an NHS Associate contributing to the NHS pension scheme, then our initial advice would be that you should not incorporate.

An Associate dentist who incorporates can no longer contribute to the NHS pension scheme and so will lose out in terms of pension funding.

Many Associates will tell us they are not worried about this, but we would always encourage seeking the advice if an IFA with appropriate experience before any decision to withdraw from the scheme is considered.

If you work wholly or mainly in the private sector then you will need the agreement of your Principal to re-issue your contract in the name of your company. This contract will need to be carefully drafted to ensure there is no implied or actual employee-employer relationship established.

Family’s annual income requirements

It is the differing rates paid on profits (up to 45%) and dividends (up to 38.1%) that attract businesses to consider the use of a company structure. The comparable rates are illustrated below:

Profits  Dividends
Basic Rate 20% 7.5%
Higher Rate  40% 32.5%
Additional Rate 45% 38.1%

Immediately you can see that there is a saving to be achieved overall in income tax for the individual. In addition, there is NIC to pay on business profits where there are no NICs currently charged on dividends.

It should not be forgotten of course that corporation tax (currently 19%) will be paid by the company.

If tax saving is your key driver, maybe to build retained funds in the company for future investment and practice acquisitions, the ideal profile would require much lower disposable after tax income than you have been used to.

Profits

Where profits are relatively small, circa £50,000, whilst there are potential tax savings to be achieved, this is often outweighed by the additional administrative burdens and increased professional fees.

For example, if we compare profits of £50,000 as a sole trader Associate or a company the following tax profile can be illustrated*:

Individual Sole trade Company Director
Tax on Profits £7,630 £7,904 £0
NIC £3,640 £0 £0
Tax on Dividends/Salary  £0 £2,118
Total £11,270 £7,904 £2,118

*2018/2019 rates

The above illustration assumes all available post corporation tax profits are paid out as dividend after a £8,400 salary.

The total tax cost is therefore £11,270 for the self-employed Dentist and £10,022 (£7,904 + £2,118) for the incorporated Dentist. The overall saving therefore, only £1,248.

If you are thinking about incorporating your dental activity, please seek appropriate advice. Contact Vanessa Pople, Head of Dental at Baldwins to discuss your options.

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