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Dentists Who Invest

Solve the sole trader vs limited company conundrum for dentists in the UK. Tax expert David Hossein breaks down the latest changes and helps you make the best decision.Podcast Episode

Full Transcript

Dr James: 

Hey team, welcome back everybody to the dentist who invest podcast. This is a podcast that I did such a long time ago and it’s more than due, more than overdue, that we need a refresher on it, because things have changed so much in the backgrounds with how tax is what, how tax is designed, which is, with how it’s you know what, how it affects us as dentists in the UK that we need a refresher, we need an update. So we’re here today to talk about the age old debate, the age old argument limited company versus soul trader and I’ve got my main man, david Hawes, on here in front of us today, who is going to be able to articulate very clearly his thoughts on the matter to get us dentists up to speed. Thanks, james, how are you today? Very good, thank you very much. You’re right. Yeah, wonderful, mate, hanging in there, hanging in there, in fact, what am I talking about? I’m thriving. I’m getting loads done these days, which is flipping great. A few big plans come to fruition, which I’m really looking forward to. So, david, there’ll be people who are listening to this podcast. Someone know who you are and some are yet to meet you, so maybe it might be nice to do a little bit of an intro so that people get to know you basically.

David: 

Yeah, thanks. So we’re a firm of dental accountants and we do two main things. Firstly, as any accountants should do your compliance work, so making sure you tick all your boxes have you done your tax returns, have you met your filing deadlines and so on. Second kind of standard what we do is working a bit closer with our clients, so we like to understand the journey that each of our client is on what their personal circumstances look like, where are they in meeting their objectives and what they look like. So what’s the plan for the next five years? a lot of our clients quite entrepreneurial, so they’re either buying practice, setting up a practice, buying properties and investments, or have already got established businesses and are looking at grooming those for sale. So how we like to work is I like to know everyone circumstances and what they’ve got on their eyes, and then we keep in touch and check in on things that they need to plan and put in place for what the events are coming down the road as well.

Dr James: 

Top stuff cool. Well, let’s jump straight in with the SoulTrader Limited Company podcast. So, david, once upon a time well, actually do you know what? I don’t know why I said that. I almost said once upon a time it was really clear cut, but it’s never been really clear cut at all. But now the boundaries have slightly shifted, haven’t they? so maybe, if you just like to cover from a high level SoulTrader vs Limited Company how that works, naturally we all start out as SoulTraders and then we have to make the decision to become a Limited Company or not. Are you with me? so maybe it might be nice if we started from a SoulTrader how that looks and then maybe explore around about when do we start thinking about the Limited Company?

David: 

Yeah, that’s absolutely. We’ve got some slides. Would you be able?

Dr James: 

to? Yes, i’ll share those just now. So there’ll be two types of people who are listening to this. There’ll be people who are listening to the audio recording on the podcast and there’ll be people who are watching the video on the Facebook group. So we will cater to both with our explanations. It’s important to mention Yeah, thanks, james.

David: 

So the slide does say associates was. You know what we say is also relevant to principles? that said, it’s easier to become a company and not become a company as an associate, where, as a principle, you often got contracts and bigger assets to move around, but the rates and numbers apply to both situations. So if you could have the first slide, please, okay. So since July 2006, dental associates have been able to trade as a Limited Company, and the main reason that you’d think about doing something like that is it allows you to control the level of income you are taxed on. So that’s the big difference between as a self-employed dentist, you are taxed on all of your income and profits, regardless of whether you spend them or not, whereas with a company, you’ve got a good level of control over what you are taxed on, because you can control what you draw from the company, which is then taxed as dividends. So, as a general rule, the more you can leave in, the better things will be. That said, if you are in the NHS, whilst you can set up a company, you won’t then be able to superannuate your earnings. That’s just not an option available to associates, unfortunately. Principles can, but associates can’t, so that’s important to make clear as well. Good stuff, yes. So how does it work? So in the UK we’ve got different tax bans. So whether you fall into basic rate band, higher rate band, additional rate band, you’ll be taxed at 20, 40, 45%. However, there is a bit of a quirk that once you go over 100,000 of profits, you start to lose your personal allowance And that means that that chunk after 100,000 is taxed at 60%, because it’s taxed first at 40% and then there’s a clawback of the personal allowance means that, as you’ve got in the box there, if your taxable profits are 110,000, that 10,000 pound has a tax bill of £6,000 on it. So little things like that just make you think well, if we had more control over how we’re taxed. It gives you more flexibility to choose the rate of tax you want to pay in. Certainly, people want to avoid 60%, 100% they do. Cool And in addition to that, so young families you know, clients who’ve got kids at nursery and so on you are able to get £500 every three months, up to £2,000 a year for each of your child, to help with the cost of that childcare. However, if your adjusted net income goes over 100,000 for either yourself or your partner, you don’t get that benefit and that’s just taken away from you. It doesn’t matter if you both earn £999,000, it’s when one of you go over. So, again, having the company and the option to adjust that can allow you to benefit from things like free childcare, which is quite helpful for small families.

Dr James: 

And, just to be super clear, who they’re receiving that from? is the government? From the government, yeah, yes, awesome, okay. So another incentive to stay under £100,000 of personal tax income. Personal tax, yes correct.

David: 

Okay. So then next a bit about the procedures. So if it is right for you, first thing you got to do is choose a name. That can be anything Dr James Martin, limited. If you do want the name the word dental in there, you have to write to the GDC, give them your GDC number, tell them why you want it. They will give you a letter which approves the use of the word dental, because it is a protected term. That’s then given to companies house. They will release the name that you’ve requested, subject to somebody else not having it. That gets you your company name and articles Beyond that we then like to think about well, what should the share structure be of that company? It is possible to involve your partner. So if you’ve got a spouse, say, who’s got a lower income than you and you want to shift some of your income over to them, use their lower rate tax band. That’s also possible. at the point you set the company up, it can bring the tax burden down further. When assessing is it right for you, we’ve got to consider a lot of different taxes income tax, dividend taxes, national insurance and corporation tax. The reason we wanted to do this podcast is it used to be much more clearer, but since the announcement in November, corporation tax has gone up. We do need to look at it again, and that’s hopefully what we’ll do today Awesome.

Dr James: 

OK, let me get this next slide up.

David: 

So that’s the kind of table of the taxes on each side. So as self-employed, you’ll pay income tax, 20%, 40%, 45%, and then national insurance, 9.73%, and then class 2, 3.45 a week. With a company. The first 50,000 is taxed at 19% And that’s the thing that’s changed this year. So from April, profits above 19% are taxed at a marginal rate of 26.5%. So your actual corporation tax rate is a blend of those two figures. Ok, beyond that, then when you draw money out, you then tax on dividends at 8.75%. If you base it rate band 33.75 for a higher rate, an additional is 39.35. You know, blend those together for your calculation. If we look at the next slide, will they? Next slide is just telling the assumptions before you show. We show you that the graph how it used to look. So this graph, the next graph, will assume that you’ve drawn all the money. Now a Lot of the planning that we do for should use a company is based around The client being financially motivated to save To meet their objectives. That could be saving for deposit of practice or saving to invest in properties, shares and so on. So But we have to give advice on if you were to draw the money. This is what it looks like and That’s that’s that first line. There It’s possible to extend the positive range. As we said before, if you get the spouse involved and they’ve got a low rate of tax, it helps increase the savings. You can also do things like make pension payments and buying an electric car. Those are additional tax savings you can put through a company. The car tax relief on electric cars isn’t available soul Self-employed people. So that’s that’s unique to having a company and it’s it’s also you have to factor that in when you do your numbers. But anyway, oh, interesting, oh it’s interesting, that’s interesting, okay cool yes, so this is how it used to look prior to April and you can see the, the line that’s above the the horizon, so up to 131,000. It was very clear that if you took all the money out, you’re still going to be saving tax. Without tax, saving now varies up to two, up to four thousand If you’ve got the spouse add on an extra 20, 25 to 30% of savings, because obviously you know you’ve got that saving there as well. There does come a point where, if you take all the money, you were worse off and that was before April. Now We’ve got the new rates and what’s changed since then. If you go to the, the next slide, sure.

Dr James: 

So and we’ll do that absolutely in two seconds, so just for the benefit of those people who are listening The graph that we can see up here in front of us. It displays a line which indicates whether or not you’re better off with drawing all of your wealth from a company, and it compares and contrasts if you’re, if you’re limited or if you’re self-employed. So what we mean by that is a sole trader or associate right, david, yes, yes, sorry.

David: 

I forgot, people are listening as well.

Dr James: 

No, no, no, it’s cool, it’s cool and this graph is really helpful. So, obviously, we’re working totally under the assumption that you’re withdrawing all the money straight out of the limited company, which very many people are to this level, but basically, it’s only. You’re only actually better off Well, actually beg your pardon and you become better off to step, better off to remain Self-employed or to remain as soul into a soul trader when we get over the 131k mark. But prior to that point, apart from a very, very, very early phase up to the first 5000, it looks like You’re better off to go limited, but it’s, of course, important to remember that these are the all rules prior to April 2023. Yes, i know that, david. Yes, absolutely, that’s stuff. Okay, let’s move on to the next one.

David: 

Yeah, so since? well, in November, obviously, the government announced the budget and changes, and what’s happened since then? so, from April, the tax redebidden allowance, which used to be two thousand pound, is now only one thousand. National insurance and dividend taxes have gone up by one percent. The the big thing, though, that people getting hit with now is that increase in corporation tax. We used to be 19%, whereas you’ve got your profits above 50,000. The tax of it 26.5%, that’s a 7.5% Real tax charge that people are incurring now. So so what does that mean? so you process all that through to the calculators and so on, and now the graph looks like this. If you could see there. So on here, i’ve done two lines the blue one, which is a continuation of the. The orange one is If you were to still draw all your money out, it’s term, it’s it starts to go down a lot sooner, and more prominent as well. So that extra 7.5% if you’re drawing all the money out, there’s a potential argument subjects, obviously, pensions and car planning that you need to look at that again. However, the people who are still winning are the people who are only drawing minimum amounts and saving money in the company. That’s the orange line and that illustrates the tax saved if you only draw in 50,000 German sub-appliance like to do.

Dr James: 

Interesting, right And just for the benefit of those listening, the orange line which displays how much tax you’re saving whenever you’re a limited company. This orange line you know it’s a little curvy and wavy in some parts but it’s pretty much consistently from the bottom left of the graph to the top right, meaning that there is a consistent saving to hire. Your earnings are providing that you’re only withdrawing 50K from your limited company for your personal spending. Is that, is that? is that about? accurate? Yeah?

David: 

absolutely. It’s the one way to savings. Keep getting bigger and bigger and bigger.

Dr James: 

Not everyone can live on 50K.

David: 

We know, I accept that Somewhere between the 50 and 100 mark is is going to give you a savings.

Dr James: 

That’s cool. It still makes total sense, despite the changes.

David: 

For those who save money in the company.

Dr James: 

yes, Yes, 100%. And then the other, the blue line. If you draw all of the money outside of the company, it makes more sense for you to be limited until about the 85K mark. It looks like.

David: 

Then a little blip down and it comes back up again and goes down again.

Dr James: 

Yes, and then there’s a small dip around the 100K mark And then actually if you’re spending around 120, 130, it begins to make sense for you to become limited again. Then, after the 135 or so, the 135K or so mark, then actually it makes more sense for you to remain sole trader if you’re drawing all of the money from your company, if you’re drawing the money out past that level, Yes, and you’ve not got a spouse involved and you’ve not done any other planning with the car.

David: 

So it’s a bit more nuanced, but we’re trying to simplify the people.

Dr James: 

Yeah, 100%, and there’ll be lots of this is. This is the one thing that struck me about limited company versus sole trader. At the very start, whenever I was just grasping this stuff, i thought it was just really black and white. I was like, above this number, it makes sense, Below this number, it doesn’t something like that. Right, but it’s actually not. There’s a few caveats to it. So what we’ve done right now, what you’ve done, david, on this graph, is made it dead simple, but we haven’t actually chucked on top all of these other considerations that may change it on an individual basis, which is why I suppose it’s helpful to have this conversation with your accountant. Yes, absolutely, talk it through with your accountant. Cool, all right on to the next slide.

David: 

Yeah, the next slide just puts that into a tabular format. So if you wanted to see the exact triggers, you can see it there. So if you start at 100,000, so if you’ve got profits of 100,000, you’re only taking out 50,000, you’re saving 6,300,000 in addition to the cash that’s in the company. So that’s certainly worth thinking about. That figure gets higher and higher, so 150,000, it’s a net saving of 13,000 plus the cash that’s in the company. So it was just for people to see it. If you couldn’t read the graph, that was what I saw.

Dr James: 

Got you And you know one thing that used to confuse me about this stuff a lot. it is important. If I’ve understood this correctly, this is your overall tax saving across you and your company, right?

David: 

Yes, company plus you all taxes, that’s the net effect.

Dr James: 

Yeah, amazing, yes, the net effect, whereas I just thought that this what I used to think back in the day was until I had that articulated to me by someone was I used to think that this was just the personal tax saving that I made or the personal loss in tax that I made, as in that affected my money outside of the company and within the company, something else was happening. I didn’t actually realise it was net overall, so it is important to mention that.

David: 

Yeah, absolutely, and, as I said, we’ve tried to simplify it. We’ve got a very complicated spreadsheet that does 20 rows and gives you each one, but just trying to make it clear this total tax savings there.

Dr James: 

Because dividends are after corporation tax right, which was another thing that I needed to learn to grasp this stuff, and there’ll be people listening to this podcast and watching this video who are at all levels of their understanding of tax, so it is important to say that stuff out loud. Yes, absolutely Okay, cool. Next slide.

David: 

Well, yeah, there is again. So other considerations. You know there’s no kind of one answer fits all. You’ve got to talk to your accountant. But other things to think about are if you’ve got multiple businesses, that associated companies rule comes in. So the 250,000 it’s split over how many companies you’ve got if they are associated. So if you own them, your director shall all those other. You’ve got to look at all companies together and chances are you’ll be paying more at 25 becomes more likely. Next point is what a lot of people are doing now is thinking well, look, if I’m going to pay 26.5% on a big chunk of my company’s profits, should I accelerate some pension contributions? and that is a bit of tax money you can do Now. You’ve still got time to do that. Tax year ends 31st of March. Corporation tax tax relief and cars That’s another tax benefit that’s unique to the company. Companies can provide you with an electric car And as long as it’s new, you’ll get a 26.5% saving on the full value of the car If you’re buying it. If you’re leasing it, it’s on the lease payments. But if you’re buying it and the company owns the car, that might be 50,000 pound. 26.5% will come off your corporation tax bill. That’s quite good. A lot of people are doing that And I say that’s not available if you’re sole traders, just for companies.

Dr James: 

We should do a separate podcast on that at some point, you know, and explain that in more detail. Something we can think about, Anyway sure can do.

David: 

Anyway, yeah, and then, as I said before, you can also involve your spouse. I don’t like to go over 25% because there are legislation and restrictions on income shifting, but 25% is pretty much safe. It’s just. it has to be done in the right ways A gift as a gift of income, not ascribing for shares and incorporation, but that’s a bit of a jargon that was accounted to need to deal with. It’s not too important. However, another thing that is important is maternity pay. So if you are an NHS dentist and you’re happy to lose the superannuation because your plans are such that your savings are going to be a replacement for the superannuation, if you are intending, or it’s possible, that kids could be on the horizon, i’d maybe wait until that’s happened, because you don’t get as generous maternity pay. If you’ve gone as a company, you’ve got to lose most of it. So that’s important to do as well. just to make sure you’ve thought that through.

Dr James: 

Worth noting. Yeah, definitely worth considering.

David: 

And, as I say, take advice, talk to your accountant. If anyone’s got any questions after that, more than happy to get in touch and see contact details there.

Dr James: 

Cool great stuff, great stuff, great stuff, great stuff. Okay, let’s just jump out of the presentation. Actually, a few more things that I’d like to ask as well. Is there anywhere that you can recommend any calculators that we can use online, in which we can input our information and figure out where we’ll be roughly or what we can expect in terms of tax?

David: 

Yeah, you absolutely can. The government’s got self-assessment calculators So that will give you the income tax if you stay a sole trader. If you wanted to compare to a company, there is a website I found, actually, but it’s not a government one. They’re not that helpful, unfortunately They won’t give you. But there’s an employed and self-employedcouk. That’s quite a good calculator. You just put your figures in, go to your accounts. What was my last taxable profit? Put that in. It’ll tell you. But what it won’t tell you is, by the way, if I want to save some money in the company, that’s a bit more. The calculator can’t do that extra step. Unfortunately it is a bit of a manual task.

Dr James: 

Yeah, yeah. What about software that charts our cash flow? Anything you can recommend in that fund? Is that what zero does, right?

David: 

Well, zero can do your cash flow, but you have to train it and feed it assumptions How do I say this? Zero is only as good as the information that comes into it. Okay, and it’s quite rare that I would recommend our clients to do their own bookkeeping unless they’ve got sufficient time and leisure to do it. And then the point is what benefit will it give you? A lot of our clients, in fact, the thing that tells them their cash flow is they look at the bank account and they ask us how much is my tax this year? and they know that they’ve adjusted for that. That’s on a very simple level. Obviously, i appreciate people have got investments and so on that they might need beyond that. Zero won’t give it you. You’ve got to pick up the phone and talk to your accountant and it’s a conversation.

Dr James: 

Gotcha. Okay, cool, 100%, David. Obviously absolutely loads to take on board there today, which is great. Absolutely loads of information, the more the better. Is there anything that you’d like to say on top that you feel might be relevant to anybody who’s listening? or maybe we’ve very neatly created something there that summarizes everything?

David: 

Yeah, well, i think that your accountant tax should be part of your financial plan. So I think people should have a financial plan And that can be I’m gonna stay as I am and grow some cash savings. That can be no, i’m gonna look at investing in things and that can be shares, that can be a practice, that can be a squat. And what’s my retirement plan? So I think people should have a financial plan. As accountants, we can’t give you financial advice on investments as we’re not insured and regulated to do that, but talk to your accountant about your numbers and make sure you understand. Well, how much do I need to spend? What am I monthly outgoing? Do I really need to draw it all? If not, if I had a complete, the effect would be this And that extra cash gives me options to do this And over 10 years it will allow me to do this. So it’s important to talk to your accountant 100% Cool, all right.

Dr James: 

Well, david, i know that we talked just beforehand, just before we hit record, and you mentioned that you’d made a PDF for dentists. What’s the name of that PDF?

David: 

Yeah, so ways to save taxes, a dentist, and so we don’t get involved in any schemes at all. This is just things that are approved guidance. So investing in tax efficient VCTs, claim it, all the allowances that you’ve got available to you, and it’s a PDF or we can put that out to people to download, and it’s a great charge, amazing.

Dr James: 

So, yeah, awesome. And basically it just gives a breakdown of every single method that a dentist can use to legally reduce their tax bill, to manage their tax and be tax efficient. is the terminology right? Absolutely Love that. Okay, and how are people best going about acquiring that? Contacting yourself.

David: 

Yeah, if that’s a people can drop me an email. I can also send it to yourself to distribute to people if they contact you as well. Sure, okay, cool.

Dr James: 

So David Hawthorne available on the group. That’s Hawthorne, h-o-s-e-i-n. And then what’s your best email, david? That’s.

David: 

David at O2oR-T-UU-K.

Dr James: 

Top stuff. David, thank you so much for your time today. Super clear, super punchy, super impactful, concise summary of what we can expect in terms of tax as dentists and how we can make that decision about Soul Trader or Limited Company, which is really, really, really valuable. Thank you once again for coming along and we’ll get you back on the Dental Soon Best podcast very soon. Thanks, James. Thank you very much.