Most locum GPs operate as what is known as Sole Traders where you, the GP are the business, owner and manager.
However a proportion of GPs are operating via Limited Companies (Ltds). In this case, the business is a separate legal entity and the GP is the director who holds all or a proportion of the company’s capital.
Operating via an Ltd is generally seen as more efficient in reducing bills for tax and national insurance contributions (NICs) for the self-employed. Operating an Ltd requires more in terms of admin, set-up and accountancy fees. The major disadvantage is that Ltd companies are prohibited from being in the NHS pension scheme.
The decision is highly individual as to whether operating via an Ltd is worth it for you. The best thing is to get an accountant to do the figures for you.
Important major differences include:
Sole traders can charge for NHS pension contributions and stay in the NHS pension scheme. Those operating via an Ltd are prohibited from doing so and will need to make their own arrangements such as through a private pension or SIPP.
The transfer of responsibility for employer contributions to practices has resulted in some locums having difficulty obtaining the pension contribution in some cases. There is also speculation that the right of locums to remain in the NHS pension scheme may be removed in the new GP contract. Going Ltd may then become a more attractive option.
GPs operating via Ltd may charge a higher hourly rate for their services to compensate for the fact that the practice does not have to pay the employer pension contribution.
Tax on profits
Sole traders pay class 2 and 4 NICs plus standard rates of income tax on profits (after allowable expenses).
There are two ways of paying yourself via an Ltd:
Paying yourself a salary as an employee. This is subject to tax under PAYE and also NICs. Typically the salary is relatively small so as not to incur large amounts of tax.
Any further income is then withdrawn as dividends. Previously these have not incurred any tax on dividends up to £31,785. However from April 2016, tax rates on dividends will be 7.5 % on all dividends greater than £5000 and 32.5% on dividends greater than £32,000.
Setting up as a Sole Trader is simple. You’ll need to inform HMRC that you’re self employed. (Failing to do this within the first 3 months will incur a penalty of £100). You’ll also need to submit an annual tax return via Self Assessment. Many locums get an accountant to do this for them (cost between £400-£600) but it is perfectly possibly to do this yourself.
Setting up an Ltd is more complicated. Ltds need to be registered with Companies House and there is a small charge to set this up. You can do this yourself or many accountants will arrange this for you. You will also need to open a business bank account in the name of the company.
Accounting for Ltds is more complicated and costly and is best done by an accountant.
Things to consider
Operating via an Ltd allows you to claim for a wider range of expenses.
Directors of Ltds can choose how much to draw from the company in a tax year. This can be more tax efficient if you expect your income to fluctuate eg if taking maternity leave.
A Ltd also protects your personal assets from any debts or liability incurred by your business.
Some locums operate as Sole Traders for any pensionable work, allowing them to stay in the NHS pension scheme and via an Ltd for any other portfolio work.
Ultimately anyone considering working via an Ltd should ask an accountant to go look at their figures and ask if it is more tax efficient and worthwhile for you.