Becoming a Limited Company Might Limit Your Tax Bill
In hard times nobody wants to pay more tax than they must.
Turning your dental practice into a limited company (incorporation) could be the answer – and it might make more money available for upgrading.
Although every dental practice is financially different, the general tax rules for small businesses apply across the board.
How do I get my personal income from my limited company?
Most incorporated practice owners pay themselves a small salary and make up their income in dividends, usually resulting in a much lower tax bill. If their spouse is also a shareholder and is taxed at a lower rate, even more savings are possible.
How does this save tax?
These savings happen because company profits paid to directors as dividends are taxed differently from salaries or wages, while sole traders and partners automatically pay income tax on all the profits of their businesses as though they were salary income. A typical benefit of incorporating is that the Corporation Tax applied to reinvested profits is usually only 20%, freeing up more capital to upgrade or expand.
How much personal income would I be able to extract from my limited company?
The proportion of income which is taken as salary can be decided by the individual director, which means he or she is has some control over the amount of tax they pay. To achieve the maximum tax efficiency, these proportions vary slightly according to how much profit the practice makes each year, and whether the director’s income is over or under the recognised tax thresholds, currently £42,475, £100,000 or £150,000.
While the idea of incorporation does not appeal to everybody, and there are a number of common misconceptions about limited companies, there are very few dental practices where the fiscal benefits of incorporation would not outweigh the potential drawbacks. What is clear is that all principals and practice owners owe it to themselves and their families to seek professional advice and investigate whether their own financial circumstances could be improved by turning their practices into limited companies.
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