Going Limited
The Probe - August 2007
No tax tips column would be complete without discussing the option that dentists have had since July 2006 to incorporate their practice.
There are a variety of advantages to be gained from incorporating, including, limiting liability and protecting personal assets, and having shareholders including a spouse or staff. However one of the main benefits driving dentists to set up limited companies is the tax savings.
Profits are typically taken from a company in the form of either salary, dividends or both. In the event of salary being taken this involves paying National Insurance (NI) contributions: employers contributions are 12.8% of the salary, and employees contributions are 11%. So even before the dentist has paid basic or higher rate tax on his salary there is already a 23.8% NI liability.
So paying just a salary does not provide the benefit, the trick most frequently recommended is to take a small salary equal to the National Insurance threshold and then take the balance of post tax profits as dividends. This can avoid NI and in some cases provide a tax saving.
There are other tax benefits aswell. By transferring the practice’s goodwill into the company a sizeable loan account can be established from which funds can be drawdown tax free. Also any profits left in the company are taxed at a lower rate than personal taxes.
Despite the above advantages, costs such as accountant’s fees and the compliance burden, in terms of completing forms for Companies House are likely to increase as a result of incorporation.
Also watch out for unintended consequences on your pension, income protection contracts and mortgage and finance applications as all these are based on your income. So before you make the move, do your sums carefully and involve all your professional advisers to make sure incorporation’s right for you.