Should you operate as a limited company or self-employed in the medical sector?

We often get asked this question, and the short answer is, it depends. Both options have their pros and cons, and the best option depends on your personal and professional circumstances, goals and preferences. You should also be aware of the tax, expenses and liabilities that each option entails, and how they affect your income and cashflow.

The main questions that we get asked by clients and our responses and advice are set out below.

What’s the difference between a company and a sole trader?
A company is a separate legal entity from its owners, who are called shareholders. A company can have one or more shareholders, who can also be directors of the company. A director is responsible for managing the company's affairs and complying with the legal and tax obligations. A company pays corporation tax on its profits, and the shareholders pay income tax on the dividends they receive from the company.

A sole trader is a person who runs their own business as an individual. A sole trader is not a separate legal entity from themselves, and they are personally liable for the debts and losses of the business. A sole trader pays income tax and National Insurance on their profits, and they can keep all the profits after tax.

The table below summarises some of the main differences between a company and a sole trader:

Will I pay less tax if I set up a company?
This is heavily dependent on the individual’s circumstances. Corporation tax rates have changed and depend on the company’s profitability. If your profits are under £50,000, the corporation tax rate is 19%. If profits are between £50,000 and £250,000, you’ll pay a marginal tax rate. If your profits exceed £250,000, the tax rate is 25%. Furthermore, if you have associated companies then these bands are reduced, and the net cast by the associated companies ruling is wide.

You can pay salaries from the company, and these would be taxed as income on the individual under the same tax rates that a self-employed individual would pay. There may also be National Insurance contributions due, depending on the level of salary. Although any salaries, plus on-costs, are tax deductible in the company.

The other method of extracting income from the company is via dividends. These are paid out of post-tax profits, and the tax rates for these have also been adjusted. Now, just £500 of dividend income is tax free for each individual annually. This is across all investments.

Basic rate taxpayers pay tax on dividends at 8.75%, higher rate taxpayers at 33.75% and additional rate taxpayers at 39.35%. Once factoring in that the company will have already paid tax on its profits, the difference in tax can be negligible. If there’s a lower earning spouse, for example, that you can share dividends with, then that can reduce the tax burden.

An alternative option is to leave the money in the company to build up over time. Once that company is no longer required, the company can be liquidated and the funds in the company distributed to the shareholders. Providing that the criteria is met, the distribution can be treated as a capital disposal and taxed as a capital gain.

Capital gains tax rates are 10% or 20% for basic and higher/additional rate taxpayers respectively, and if business asset disposal relief applies, then it may be possible for the entire liquidation proceeds to be taxed at 10%, irrespective of taxpayer status.

This is an option where tax savings can be achieved but is very much a longer-term investment and the tax landscape may not be the same when liquidation becomes an option.

Can I use the company’s money for personal expenses?
The company is a separate legal entity, and therefore, the money in the company is to be used for the company’s benefit. Any personal expenses which are not for the purpose of the company’s trade would be treated as money being paid out to the directors/shareholders. You can borrow money from the company, but this may come with tax implications if the loan isn’t repaid in a timely manner and interest needs to be charged in line with HMRC’s official interest rate.

Conversely, as a self-employed individual, any money you earn is yours to do with as you wish, after paying the tax and National Insurance liabilities due.

What can I do with the company’s money then?
One option is that the company can make pension contributions on behalf of its directors. A pension is a tax-efficient way of saving, as you can get tax relief on the contributions that you or your company make, and the growth of your pension fund is tax-free. The company can claim the cost of the pension as an allowable expense and reduce its profits and corporation tax. This may not be worthwhile if you’re an active member of the NHS Pension Scheme, but it can be used to bolster the retirement savings of a lower earning spouse.

Another option would be to purchase a car in the company’s name, which can be used by the directors for both business and personal use. This would be a benefit and would need to be reported as a benefit in kind on form P11D. The company can claim the running costs of the company car as an allowable expense, and also claim capital allowances on the purchase or lease of the car. If the company pays for fuel, then there’s also a fuel benefit which would need reporting on form P11D.

Need help?
There are many factors to consider when choosing between a company and a sole trader for your medical business. We would strongly recommend that this is something that you discuss with a professional before making a decision. If this is something that you’re considering, please get in touch with our Medical accounting team. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

George Crowe