Should you set up a limited company for locum GP work?
Dr Surina Chibber outlines the pros and cons of setting up as a limited company for locum GPs
Dr Surina Chibber outlines the pros and cons of setting up as a limited company and explains how changes to IR35 legislation can impact on this
What is a limited company?
A limited company has its own legal identity and is treated as a ‘person’. As a shareholder your liability is limited (hence the name – ‘limited by shares’). The company is run by directors and has shareholders. As an individual locum, you can be both. You will need to have a designated bank account in the name of the company.
Other shareholders could include your spouse/partner, but only if they are going to do some work for the company. However if they do only a small amount, the shareholdings should reflect this.
How do I pay tax as a limited company?
The main difference between a limited company and sole trader status is tax.
Companies pay 20% tax on profits via the Corporation Tax scheme. However you will have further tax to pay when you take money out of the company.
You will pay tax as an individual and an employee of the company. You can also receive dividend payments, which you also have to pay tax on. As of April 2018 tax on the first £2,000 is at 0% and then after this tax is paid dependent on which income tax band you are in. A basic rate tax payer will pay 7.5%, a higher rate tax payer will pay 32.5% and an additional rate tax payer will pay 38.1%.
Pros of setting up a limited company
The personal liability of shareholders is restricted to the face value of the shares they have subscribed to. Workers (directors) are paid a salary (taxed via Pay as You Earn at source) and this cost is incurred as a company expense. These expenses can then be deducted prior to paying company tax – remember the company is a ‘person’ in its own right and pays tax as any other person would. Any residual profits can then be paid to shareholders as additional income in the form of dividends. As previously mentioned you can include your partner or spouse on the books and give them a salary and some shares. This can provide some significant tax savings, especially if they are a basic rate tax payer.
Cons of setting up a limited company
As with working for a locum agency, you cannot use your wages paid through a company to contribute into the NHS Pension Scheme so you will lose the pension benefit and the tax relief on this.
You will also have to make yearly submissions of legally prepared company accounts and an annual return at Companies House where they are published and accessible by anyone who wishes to view your data.
Expense calculations can also be a bit trickier. As a limited company you are an employee so expenses claimed must be wholly, exclusively and necessary for the business. For example, in the case of mileage claims, you have to submit an expense claim to the company like any other employee. The company then reimburses your cost, but this is seen as a benefit in kind for you as the employee, involving additional paperwork for the company in the form of a PD11 and your having to pay tax on this benefit. In contrast, a self-employed (sole trader) GP benefits from much more relaxed expense rules, although they do still have to be wholly and exclusively for business purposes.
If your company turnover exceeds £83,000 your business will need to charge VAT on any invoices. Also, if you are performing a HR/Office/Managerial advisor locum position, where you are not treating patients directly, you will need to charge standard VAT rate for your service. Visit the HMRC website for a full breakdown on how VAT is applicable for locum doctors.
IR35 – off-payroll working in the public sector
The IR35 legislation introduced in April 2017 applies to individuals working through a limited company, who would normally be classed as an employee if they did not have that company. If you work regularly for one practice and do the same sessions every week, you are really an employee and will be caught by IR35.
If so, then you can expect to pay about 25% more in tax every year. The practice will have to pay your invoice after deducting PAYE and employee’s national insurance contributions. You will more than likely be financially worse off than you were before.
Ways to avoid the IR35 bracket
Check the government online employment checker to identify your IR35 status.
- Do not work exclusively for just one practice.
- Make sure you’re in the position of being in control of how, where and when you work, in other words, being your own boss.
- Ensure that your contract states that you can use a substitute should you be unavailable for a session. Ensure the substitute isn’t a regular GP at the practice you are working at. The practice will then pay your company and you will, in turn, pay the substitute for doing the shift for them.
- Make sure that your terms and conditions state that you will provide your own equipment and materials in your doctor’s bag.
- Keep a record of all the different income streams you have alongside locum work, an online toolkit which allows you to record all types of work can be helpful for this.
- Provide your own car for home visits.
- Do not take advantage of any employment benefits from practices you work for, for example sick pay, holiday pay, staff away days.
If you would like further information on how these tax changes may affect you can visit the HMRC government on line employment checker or access my recent IR35 webinar.
Dr Surina Chibber is a locum GP and co-founder of My Locum Manager