How does tax relief work for locum doctors using a limited company?

As a locum doctor you may work via an agency or the NHS – or you may decide to operate through a limited company

Using a limited company

A limited company is separate from you personally and is responsible for any legal and financial decisions. The limited company’s finances are also separate from your own and, as such, the money you make belongs to the company, and you are paid through the company.

Many locum doctors work via agencies and the NHS, which handle their pay and taxes in a similar way to a direct employer in that they are taxed at source under normal PAYE rules. This is straightforward, without the need for an accountant. However, in some circumstances locum doctors may choose to set up and operate through a limited company to take advantage of the forms of tax relief this arrangement offers.

Advantages of a limited company

If you set up your own limited company it will pay corporation tax of 19% and you can pay yourself a combination of salary (tax-deductible expense) and dividends (out of post-tax profits).

Salary income over the personal allowance is taxed at 20% for basic rate taxpayers, increasing to 40% and 45% for higher rate and additional rate taxpayers respectively. For dividends received after 6 April 2018 there is a new ‘dividend allowance’ of £2,000 (0% rate). Dividends over the £2,000 allowance are taxed at a rate of 7.5% for basic rate taxpayers, rising to 32.5% and 38.1% for higher rate and additional rate taxpayers respectively.

As part of these changes the dividend tax credit will cease to apply. Whether or not you will benefit from a reduction in your tax liability on your dividend income will depend on the amount of income received, and the tax band into which such income falls.

You can also claim business expenses through your company, including items such as stethoscopes, scrubs and laptops, which will be deducted from your company’s profit and will, therefore, decrease the amount of taxable profit at the end of the year.

 Disadvantages of a limited company

There are greater accounting and tax return requirements when operating as a limited company and you will need to maintain detailed records of your hours, rates, dates of contracts and expenditure.

You are strongly advised to seek the advice of an accountant when setting up your limited company so, if locum work is only a part of your regular income, it may be easier to remain working for agencies operating PAYE.

One of the major disadvantages of running a limited company is that you cannot contribute to an NHS pension based on any income you receive this way so, in some cases, it is wise to make alternative contributions to a private scheme. You can generally list these contributions as expenses as long as they are no more than £40,000 a year from both employer and employee.

​Read the full HMRC guidance on setting up a limited company. 

Legislation relating to intermediaries

Under rules known as ‘IR35’, a PAYE and National Insurance contributions (NIC) liability arises if a worker contracting through a company (or other intermediary) has the hallmarks of an employee.

• Before 6 April 2017 liability rests with worker’s limited company and not the organisation where the individual works.  
• From 6 April 2017, where public bodies (including GMS/PMS practices) engage workers through a limited company, responsibility to apply the intermediaries’ legislation falls on the public sector body or agency. 

So, for example, an NHS trust will have to review a locum doctor’s circumstances and decide whether or not to withhold PAYE and NIC, as if the locum were an employee.  ​