Can I use a limited company for my private earnings?

There is a possibility that you could use a limited company for your private earnings, however there are pros and cons that must be considered very carefully. A limited company is a separate legal entity, and one of the main advantages is that of ‘limited liability.’ A shareholder’s liability is limited to the amount of investment in the shares. The requirement for personal indemnity, however, in the healthcare sector reduces such a benefit.

There may also be tax savings from operating through a company. If structured in the correct manner, there may still be opportunities to bring a spouse or other family members in as shareholders to utilise dividend and savings allowances and lower rate tax bands. National insurance is not payable on dividends, which can provide a further saving, although the alteration of dividend tax rates and the removal of the dividend tax credit in 2016 has altered this position to a degree. If the income is not actually required, then additional savings can arise by leaving the money in the company and extracting it as capital when the company is wound up. All the necessary hoops need to be jumped through, and there may be significant extra cost in doing so, but all these things can add up to considerable savings, albeit under the current capital gains tax regime.

On the downside there are more administrative burdens by operating through a limited company. Accounts need to be filed with Companies House, annual returns of officers and shareholders need to be submitted as well as corporation tax returns made to HM Revenue and Customs (HMRC). All this inevitably leads to higher accountancy costs, so it must be understood that any tax savings should outweigh any extra costs incurred, otherwise there is little point in the venture

In addition, there is considerable exposure to HMRC attack. They are keen to stamp out what they perceive as disguised remuneration (typically tax advantages obtained through loan arrangements). It is also important to steer around the agency rules. These require companies to deduct employee tax and national insurance from a worker’s pay where it is considered that the company is providing staff as opposed to medical services. There is also a VAT risk in this area as the supply of staff is a fully VATable provision and an additional 20% would therefore need to be charged. Worker employment status also needs addressing; the IR35 rules impose employee tax and national insurance where HMRC deem a contract of service style arrangement to be in place. From 2017, heightened compliance requirements were introduced in this area where the services being provided are to public service organisations.

Another consideration is the pension position. By operating through a limited company, income ceases to become pensionable in the NHS Pension Scheme. For some this may be an advantage because of potential pension tax charges (Annual or Lifetime Allowance), for others a disadvantage. It is therefore important in such cases that a suitably qualified and experienced specialist Independent Financial Adviser is involved so that a full appreciation is gained. As can be seen, there may be significant advantages of operating through a limited company, but there are also a number of potential risks that should be mitigated as far as possible. This may involve putting appropriate contracts and/or service level agreements in place. This is not as straightforward an area as many may believe.

Further information

If you would like further information, then please contact David Walker, Senior Tax Manager – Healthcare Services on 01253 404404 or email david.walker@mooreandsmalley.co.uk