Setting up a company to minimise tax on temp/locum work
Discussion
I am currently in PAYE employment for 4 days a week and am doing temp/locum work (as a doctor) in my days off. My PAYE employment takes me into the 40% tax bracket and any earning from my temp/locum work is being taxed at 40%.
I have heard that by setting up a company to cover my temp/locum work, I can reduced the tax bill on my temp/locum income by drawing my earnings as dividends. I expect to earn about £30k/year from my temp/locum work, would it be worth setting up a compnay for this and how does it work?
Thanks.
I have heard that by setting up a company to cover my temp/locum work, I can reduced the tax bill on my temp/locum income by drawing my earnings as dividends. I expect to earn about £30k/year from my temp/locum work, would it be worth setting up a compnay for this and how does it work?
Thanks.
Is your current locum work treated as Self Employed income or Employment income?
What is your professional regulator's atitude to doctors practising through a limited company format?
Are there any professional insurance limitations on operating through your own limited company?
You need to check out the implications of IR35 - especially if the current locum work is administered through PAYE..
What is your professional regulator's atitude to doctors practising through a limited company format?
Are there any professional insurance limitations on operating through your own limited company?
You need to check out the implications of IR35 - especially if the current locum work is administered through PAYE..
Is it working in hospitals or outside ?
Would the hospitals allow you to invoice them as a company ? Some of them can be a pain to deal with.
You will have increased accountancy charges and more precise paperwork to deal with. With that kind of earnings going into the limited company, it is probably on the borderline of whether it is worth setting up a company.
Company income is taxed at 21% and then again at 22.5% when withdrawing dividends I think (for a higher rate tax payer).
Would the hospitals allow you to invoice them as a company ? Some of them can be a pain to deal with.
You will have increased accountancy charges and more precise paperwork to deal with. With that kind of earnings going into the limited company, it is probably on the borderline of whether it is worth setting up a company.
Company income is taxed at 21% and then again at 22.5% when withdrawing dividends I think (for a higher rate tax payer).
Eric Mc said:
Is your current locum work treated as Self Employed income or Employment income?
It is treated as self employed incomeEric Mc said:
What is your professional regulator's atitude to doctors practising through a limited company format?
I'll need to investigate this further but I don't think they have a problem with it. From what I've heard, a lot of doctors who only work as locums (i.e. they do it fulltime) have gone down this route. As long as it is legal, I can't see how anyone can object.Eric Mc said:
You need to check out the implications of IR35 - especially if the current locum work is administered through PAYE..
Sounds like I need to speak to a medical accountant to sort this one out!sinizter said:
Is it working in hospitals or outside ?
Would the hospitals allow you to invoice them as a company ? Some of them can be a pain to deal with.
You will have increased accountancy charges and more precise paperwork to deal with. With that kind of earnings going into the limited company, it is probably on the borderline of whether it is worth setting up a company.
Company income is taxed at 21% and then again at 22.5% when withdrawing dividends I think (for a higher rate tax payer).
Small Company Corporation Tax is currently 21% (profits below £300,000) but this is reducing to 20% on 1 April 2011.Would the hospitals allow you to invoice them as a company ? Some of them can be a pain to deal with.
You will have increased accountancy charges and more precise paperwork to deal with. With that kind of earnings going into the limited company, it is probably on the borderline of whether it is worth setting up a company.
Company income is taxed at 21% and then again at 22.5% when withdrawing dividends I think (for a higher rate tax payer).
Dividends are subject to Income Tax but not NI. If the taxpayer's personal income from all sources in any given tax year is below the 40% tax threshold (currently £43,875), they will pay no Income Tax on the dividend. If the income goes above the threshold, that part of the dividend over the £43,875 level will be taxed at 32.5%. If the taxpayer earns over £150,000, dividend income over that level will be taxed at 42.5%.
My concern is whether it is actually allowed from a professional or ethical point of view to operate as a professional medical doctor through a limited company.
996c2 said:
sinizter said:
Company income is taxed at 21% and then again at 22.5% when withdrawing dividends I think (for a higher rate tax payer).
21% company tax and then 22.5% dividends tax! Sounds like I am better off sticking to the 40% income tax...oh well
Can you answer my questions?
Don't we get dividend tax credit of 10%? Thereby the 32.5% effectively becoming a 22.5% ?
From reading around on the Medical Protection website, it does seem that doctors can do work through a limited company for private work - so shouldn't really be ethically different to work as a locum the same way.
From reading around on the Medical Protection website, it does seem that doctors can do work through a limited company for private work - so shouldn't really be ethically different to work as a locum the same way.
Edited by sinizter on Saturday 21st August 11:36
Edited by sinizter on Saturday 21st August 11:37
sinizter said:
Don't we get dividend tax credit of 10%? Thereby the 32.5% effectively becoming a 22.5% ?
From reading around on the Medical Protection website, it does seem that doctors can do work through a limited company for private work - so shouldn't really be ethically different to work as a locum the same way.
The 10% tax credit satisfies your tax liability at 20% (yes, I agree - it's bonkers - blame Ed Balls and Gordon Brown). Any element of the dividend that falls into the higher rate tax band will be taxed in full at 32.5% (and 42.5% if over the £150,000 threshold)..From reading around on the Medical Protection website, it does seem that doctors can do work through a limited company for private work - so shouldn't really be ethically different to work as a locum the same way.
Edited by sinizter on Saturday 21st August 11:36
Edited by sinizter on Saturday 21st August 11:37
Eric Mc said:
He's wrong. Read my post for the correct rates.
Can you answer my questions?
Thanks for the reply Eric. Sorry but I am not sure which of your questions I have not answered.Can you answer my questions?
In any case, regardless of whether your or sinizter's rate is correct, it is not worth me pursuing this course of action as there is little/no tax benefit in it for me.
I think the benefit is there for those full time locums who can pay themselves an arbitarily small salary and take the rest of their income in dividends. Since my PAYE salary cannot be converted to dividends, I cannot take advantage of this tax scheme in the same way.
Why not?
First of all, I asked was your current locum income taxed under PAYE or as seldf employed. I think you have confirmed it was PAYE.
Secondly, I asked about whether you were actually ALLOWED to practise as a locum using a limited company.
I also asked if you were aware of IR35.
You also seem to be ignoring the different liabilities you would have to NI between self-employed, employment or dividends from your own company. The tax benefits of having a limited company may not always be that great (although they do exist) but the NI benefits are very high. In actual fact, IR35 was instigated to prevent people using limited companies to minimise their NI payments as much as their tax payments.
Also, operatintg through your own company allows the ccompany to offset business expenses against the company income, which will help reduce both Income Tax and NI liabilities not to mention Corporation Tax.
First of all, I asked was your current locum income taxed under PAYE or as seldf employed. I think you have confirmed it was PAYE.
Secondly, I asked about whether you were actually ALLOWED to practise as a locum using a limited company.
I also asked if you were aware of IR35.
You also seem to be ignoring the different liabilities you would have to NI between self-employed, employment or dividends from your own company. The tax benefits of having a limited company may not always be that great (although they do exist) but the NI benefits are very high. In actual fact, IR35 was instigated to prevent people using limited companies to minimise their NI payments as much as their tax payments.
Also, operatintg through your own company allows the ccompany to offset business expenses against the company income, which will help reduce both Income Tax and NI liabilities not to mention Corporation Tax.
996c2 said:
My PAYE employment takes me into the 40% tax bracket..
I expect to earn about £30k/year from my temp/locum work, would it be worth setting up a compnay for this and how does it work?
Thanks.
Ignoring costs / expenses etc for the moment, if your company had profit of £30K it would (from April 2011) pay 20% Corporation tax leaving £24K to pay as dividend. This is grossed up to allow for the included 10% tax credit so it becomes £26,667 for tax purposes.I expect to earn about £30k/year from my temp/locum work, would it be worth setting up a compnay for this and how does it work?
Thanks.
As you're already a higher rate tax payer, you pay 32.5% on the £26,667, which is £8,667 but less the tax credit of £2,667 means you "only" have to actually pay £6K. So you get left with £18K of the original £30K. Amazingly you've lost 40%. (You would have lost more with higher rates of Corp tax).
What you do save is employees NI. But you've got the cost and hassle of the admin of the company. Whoever is contracting your services also saves employers NI if they normally employ on a PAYE basis, assuming they paid you at the same rate.
I suppose where you'd really gain is if you could charge a higher rate as self-employed contractor / consultant than you can on PAYE.
When you receive a dividend, it is DEEMED to have had 10% tax taken out of it before you received it.
For instance, if you pay yourself a dividend of £10,000 from your own company i.e, you transfer £10,000 from the company bank acount to your personal bank account, you enter the dividend on your Self Assessment tax return as a "Grossed Up" dividend of £11,111.11 with a 10% Tax Credit of £1,111.11.
The Grossed Up figure of £11,111.11 is treated as your total Dividend Income (not £10,000.00).
If you are a Basic Rate tax payer, you will not be asked to pay the £1,111.11 over to HMRC as the Tax Credit of £1,111.11 is "deemed" to satisfy your Basic Rate tax liability on the dividend.
If you are a higher rate taxpayer, you will pay 32.5% on that part of the £11,111.11 that goes over the £43,875 Higher Rate Threshold (I am including the Personal Tax Allowance of £6,475). You will be given a Credit for the £1,111.11 "deemed" to have been deducted at source on the dividend (even though it wasn't really).
For instance, if you pay yourself a dividend of £10,000 from your own company i.e, you transfer £10,000 from the company bank acount to your personal bank account, you enter the dividend on your Self Assessment tax return as a "Grossed Up" dividend of £11,111.11 with a 10% Tax Credit of £1,111.11.
The Grossed Up figure of £11,111.11 is treated as your total Dividend Income (not £10,000.00).
If you are a Basic Rate tax payer, you will not be asked to pay the £1,111.11 over to HMRC as the Tax Credit of £1,111.11 is "deemed" to satisfy your Basic Rate tax liability on the dividend.
If you are a higher rate taxpayer, you will pay 32.5% on that part of the £11,111.11 that goes over the £43,875 Higher Rate Threshold (I am including the Personal Tax Allowance of £6,475). You will be given a Credit for the £1,111.11 "deemed" to have been deducted at source on the dividend (even though it wasn't really).
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