The Summer Finance Bill 2015 has confirmed that the corporation tax rate will be set at 19% for the financial years beginning 1st April 2017, 2018 and 2019 and will be 18% for the financial year beginning 1st April 2020.
What does this mean for doctors running Limited Companies for their private practice?
Well, put simply, the new cuts mean doctors who have set up Limited Companies for their private earnings will pay less tax on their corporate profits. It is thought that the new rates of corporation tax will give the UK the lowest rate of corporation tax out of all developed western nations.
Essentially this means that doctors who are deciding on which trading entity to run their private earnings through may be significantly influenced by the rate of corporation tax payable (especially when compared to the higher rates of tax payable already on your NHS earnings). Where profits earned on your private earnings exceed the amount you actually require for personal expenditure, retaining profits inside the company will mean significantly less tax will need to be paid than if profits had been earned by the doctor as a higher or even additional rate tax payer.
So apart from the above, where are the planning opportunities?
Given interest rates are still very low on cash deposit accounts it is likely that any doctors who simply put their company profits from private work in a company bank account will earn very little interest - and this means there will likely be very little tax to pay on that interest anyway. Therefore from this perspective there will be little difference.
What of corporate investment of cash on deposit? A company can invest cash just as an individual can and can be a useful way of ensuring funds generated from the business are working for you - not sitting on the sidelines earning nothing. However, advice needs to be sought - liquidity needs, appetite for investment risk, availability of funds for pension contributions, business expenses all needs to be taken into consideration before corporate cash is simply invested.
When your Limited Company invests in unit trusts (of shares), it is worth noting that the dividends received by your Limited Company are likely to be free of tax and only capital gains over inflation will be subject to corporation tax when the gain is actually realised. Please note that the way in which dividends will be taxed changes from 6th April 2016 and so we will have to review how this effects Corporate investors.
Before any investment is made, the availability or not of entrepreneurs relief needs to be considered and professional advice taken.
Any other recent considerations when thinking of operating through a limited Company?
One of the biggest considerations will be how you eventually extract the income from the Limited Company. The usual way will be through dividends thereby eliminating the need for National Insurance. From April 2016, there will be a new tax-free Dividend Allowance. The Dividend Allowance means that you won't have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have. However the rates of tax you pay on dividends you receive above £5,000 are changing to the following:
- 7.5% on dividend income within the basic rate tax band
- 32.5% on dividend income within the higher rate tax band
- 38.1% on dividend income within the additional rate tax band
Eventually extracting the income you have received from your Limited Company in the most tax efficient way will require careful thought and future planning. The existence of Entrepreneurs Relief makes a simple liquidation of your Limited Company look attractive at first glance. Dividends will have to be taken in a much more circumspect way in the future than was previously the case. Spreading of share-holdings across family members or making a personal investment in tax relievable schemes such as Venture Capital Trusts or Enterprise Investment Schemes to negate any tax suffered are also possibilities. Always take advice before acting.
If you are a doctor in private practice, please get in touch for an informal chat on how best to structure your private earnings. Please email firstname.lastname@example.org or telephone 0117 9665699.