One of the major decisions most doctors have when starting out on the locum path is choosing how to be paid. This may sound odd but you actually have more than one option – you can either be paid as a sole trader or via a limited company. For many people, the idea of setting up a limited company simply to get your salary into your hands seems like a lot of hassle – and in some cases it simply won’t be worth it. However there are also some significant benefits to doing so whether you’re pursuing neurology jobs, surgical jobs or ENT jobs.
Pros
Perhaps the most obvious benefit of setting yourself up as a limited company is the tax you pay. Corporation tax is 20-21% whereas personal income tax rates can rise to 40% once you’re earning more than £32,000. So, you could essentially halve your tax bill.
Limited companies have limited liability – this means that the company provides a shield against any claims made against those within it. Essentially, it will protect your personal assets if someone makes a claim against the company.
If you’re set up as a limited company then you can claim business expenses through your company – i.e. anything that has been incurred in the course of being a locum. These expense can be set off against your company profits at the end of the year to reduce the amount of taxable income.
Cons
It’s more complicated than being a sole trader and there are accounting requirements over and above simply keeping track of your finances and filing a self assessment tax return.
You will need to have a private pension set up. This is because, as a limited company, you cannot claim an NHS pension. However, there is an up side – contributions you make to a private pension scheme can be expensed as long as they’re under £400,000 per year (employer and employee together).
You will need to get your head around IR35 legislation – this has been designed to stop tax avoidance but can make life quite complicated for anyone who isn’t an accounting expert. Each contract for every locum job must be IR35 compliant or your could find yourself being challenged – unless you’re locuming full time it can be better to avoid a limited company for this reason.
So, essentially a limited company is a great idea to reduce your tax bill and provide some business protection as long as you have the time to understand what is required and to do it properly.
