2015 Budget implications for Limited Companies
By Dr Matthew Beddoe
The 2015 Budget created some large talking points with regards to the national living wage, raised personal allowance and inheritance tax.
However, it was very easy to miss a smaller change that may have a significant impact on any locum doctors who work as a limited company. The Chancellor announced changes to the taxation of dividends which limited company owners have currently been able to vastly reduce their tax bills through.
GPs who set up limited companies to put their locum work through effectively set up a business which is separate from them and their personal finances. Any profit the company makes is owned by the company after it pays corporation tax. Operating in this way has some advantages and disadvantages.
- The main advantage of this method is reduced tax liability. If your locum earnings are high enough, then your company can pay a 20% corporation tax, then pay part of the profits out as a salary to the doctor (using their tax free allowance) and the rest as dividends (currently tax free). You also wont have to pay national insurance contributions which is a substantial saving.
- Working as a limited company is involves more paperwork and is associated with larger accountants fees therefore it may only be worthwhile if you are working as a full time locum. MyLocumManager will record all your income and expense data for you which will help make keeping your company accounts a much simpler process.
- You cannot claim an NHS pension when working as a limited company therefore you need to consider the benefits of your tax savings versus any loss of NHS pension.
These GPs will pay themselves a minimal salary from the company which would make use of the annual £10k tax free allowance. Then the company pays corporation tax at 20%. The rest can be paid out as a dividend, and currently, if the dividend goes to a basic rate taxpayer, then up to an additional £30k can be paid without paying any extra tax.
The Chancellor plans to start closing this loophole and announced an initial 7.5% tax on all dividends earned over a new £5k allowance and up to the base rate allowance limit. Above this the tax rate jumps to 32.5% and then again to 38.1%.
For example, a GP locum works as a limited company. They receive a £10k salary and then £30k in dividends at no additional tax. When the new budget comes into force, only the first £5k will be tax free. The remaining £25k will be taxed at 7.5%, costing the GP an extra £1875. It is thought that over time, this tax rate will increase further.
Essentially this means that income tax for these doctors will jump from 20% (corporation tax) to 27.5%. Anyone facing this jump in tax level should seek advice with regards to plan ahead before April 2016 so that they can minimize their later tax liability.