With the recent changes to the Scottish Income Tax system, many dentists are considering how to run their business more tax-efficiently.
A useful tool to achieve this could be the incorporation of their sole trade or partnership business to a limited company.
A comparison of the tax rates at play are stark; Profits within a limited company are subject to corporation tax at 19% (falling to 17% from April 2020), compared to self-employed profits which can be charged to Income Tax at rates as high as 46%. Additionally, self-employed individuals are subject to Classes 2 & 4 National Insurance Contributions, which add an additional tax burden.
In basic terms, the tax payable on business profits can be reduced. However, personal taxes due when company profits are extracted must also be considered.
The transfer of any business assets to the limited company, such as Goodwill or Land & Buildings, will be treated as chargeable disposals for Capital Gains Tax purposes. These disposals must take place at market value and any gains will be charged to tax at the reduced rate of 10% (excluding Goodwill which is taxed at 20%).
The disposal of any business assets to the company will create a ‘loan account’ of funds due to the Directors (equal to the assets’ market value) and this can be withdrawn tax-free in a similar way to drawings from a self-employed business. The creation of this loan account also allows shareholders to structure their personal tax affairs in such a way that the majority of their required annual income is taken tax-free.
However, a word of warning, a business incorporation may not be suitable for all dental practices, particularly those that have high levels of NHS income or receive substantial grant funding.
If this is something that you think may be benefit you, please do not hesitate to contact Blair Hay (firstname.lastname@example.org) and we can prepare an Incorporation Review to outline the advantages.