Pros & cons of becoming a company in the medical sector
Incorporating a business into a limited company comes with many pros and cons across all industry types and there are additional aspects to consider when you work in the medical sector.
Firstly, the pros:
- A company can be beneficial for tax purposes as a sole trader will pay tax at 20-45% on their profits, whereas a limited company pays tax at 19%.
- If you want to withdraw money from the company, you can pay yourself a salary on which the company will receive corporation tax relief. PAYE will be deducted and paid by the company directly to HMRC.
- In addition to, or instead of, a salary, you can vote dividends out of the company’s post-tax profits. Dividends are taxed at different rates to self-employed profits, with everyone receiving a £2,000 tax free dividend allowance each year, and any amount above this being taxed at 7.5%, 32.5% or 38.1% for basic, higher and additional rate taxpayers respectively. If you choose not to receive an income from the company, via dividend or salary, you can retain profits within the company until such time as you wish to draw them or decide to wind up the company. Only at the stage of withdrawal or winding up would you be taxed on those monies, either as income or capital, depending on the circumstances at the time. This can be beneficial where you have other sources of income and wish to minimise your personal tax liability until such time as your income requirements change.
- A company can be set up with multiple directors and shareholders. In the appropriate scenario, this can be used to provide lower earning spouses or family members with a share of the profits to be taxed at lower tax rates.
- A company benefits from limited liability. This means that if your company ever runs into trouble, your personal assets are protected, whereas if this were to happen as a sole trader it is possible that your personal assets and finances could be at risk.
- Another advantage to a limited company is one that isn’t widely used in the medical sector, and that is setting up a company pension or making payments into a director’s personal pension. The NHS Pension Scheme is an excellent scheme but can cause annual allowance issues. Additional pension contributions from a company would create more growth overall and possibly higher tax charges. However, if you wanted to boost your pension entitlement, or that of your spouse or family members, a company can invest pre-tax amounts into pension schemes for its directors.
Moving onto the disadvantages:
- You cannot pension earnings put through the company into the NHS Pension Scheme. To pension such earnings, you would have to remain a sole trader.
- A company can be more complex to set up than a sole trader and getting the structure right at the beginning is vital. There are various options to consider and it is always best to seek advice before setting up a company.
- A company has a greater number of administrative requirements than a sole trader. A sole trader completes a tax return once a year, whereas a company must produce full and filleted accounts, a corporation tax return, the annual confirmation statement, maintain the persons of significant control register and statutory books. Due to this, the accountancy fees associated with a company are greater than those for a sole trader.
- The company is a separate entity, which means that any income earned via the company is not the individuals. If you want to withdraw money from the company then strict procedures must be followed. Plus, if you want to withdraw all of the income earned by the company, this would be from post-tax profits and it is possible that the total tax paid by you and the company would be greater than as a sole trader. It is necessary to compare different scenarios to ascertain whether there would be benefits to incorporation.
Overall, a company can be beneficial, if set up for the correct reasons and run effectively. However, advice should be obtained before making any decisions.
For more information please get in touch with your usual Larking Gowen contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email firstname.lastname@example.org.
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