Here at Hive, we are all about making sure you are as tax efficient as you can be. What this means in practice is deploying our unique approach to properly appraise and assess if your current structure is the most appropriate set up for your needs.

In particular, for associate dentists, this often means one of our first interactions with clients who join us is appraising if a limited company for your associate income may be a more tax efficient approach. Setting up a limited company is something most associate dentists have heard about, it may be that some of your friends or colleagues are already working in this way, so how will you know if this is the right path for you?

Your Earnings Are More Than Your Needs

The first big indicator to us that a company may provide you with tax savings is if you tell us that your current earnings exceed what you actually need in order to live off.

As a sole trader, you are taxed on your profits (income less deductible expenses) no matter if you spend all of these profits or not. Often for dental associates, this means paying higher rate, if not additional rate tax.

Under a company structure, you have much more flexibility and control over your personal income, as you can decide how much salary and dividends you wish your company to pay out to you. Your company will still report and pay tax on its profits, however this is at a much lower initial rate (25% vs potentially 40% + national insurance as a sole trader)

Your Earnings Are Over £100,000

A second trigger point for us is when we hear that someone’s earnings are now looking to exceed £100,000 in a year. The reason for this is, if your taxable profits as a sole trader exceed £100,000, you begin to lose your tax free personal allowance. For every £2 that you exceed this limit, you lose £1 of your allowance. The tax impact of falling into this band is particularly painful, being an effective rate of 60% (yes – you read that right!)

A company may help with this situation, as again with careful planning from Hive, you may be able to limit your personal income going forward to avoid exceeding this £100,000 threshold.

Family Planning Options

Sometimes it is the case that married couples/civil partners have access to family planning options that can dramatically reduce a household’s combined tax exposure. If one partner earns a larger amount than the other, a company may allow the couple to more evenly split the income between the two of them. By spreading personal income more evenly across a couple, this stops any one person being subjected to potential significant tax liabilities and can save tens of thousands of pounds in taxes each year.

You’re Interested In Owning A Practice

Another very good starting point to discuss a limited company for an associate dentist is when we find out they have ambition of buying a practice of their own in the future.

There will undoubtedly be the requirement on any practice purchase to put down a deposit of anywhere between 10% – 20% of the purchase price, not to mention cash that will be needed for renovations, marketing and working cash flow. A limited company may offer the perfect vehicle for an associate to begin to save money for all of these elements, in a much quicker manner than they would be able to as a sole trader.

This is because whereas a sole trader will pay potentially 40% tax on their earnings, a company will only pay a maximum of 25%, so cash can be accumulated at a much quicker rate for investment than a sole trader can.

Of course, the above list isn’t exhaustive, and sometimes there are other factors at play that may mean that setting up a company isn’t right for everyone. However, as a client of Hive, you can have confidence in knowing that we will always consider any potential tax saving options available to you and review this on a regular basis, implementing solutions at just the right moment for maximum effect.

If any of the above points resonate with you and you’re interested in finding out more about limited companies, get in touch with us today.