Dentists Who Invest Podcast
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Dentists Who Invest Podcast
Sole Trader Vs Ltd Company For Dentists In 2024 with Mike Bryan DWI-EP289
For more questions/inquirues, feel free to reach out Mike Bryan here: http://www.humph.co.uk
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Unlock the secrets to navigating the complex tax landscape for dentists with insights from Mike Bryan, a leading accountant specializing in dental practices. In this episode, we promise to demystify the advantages and pitfalls of operating as a limited company versus a sole trader, especially in light of recent tax changes. Mike takes us on a journey through the history of limited companies in dentistry, starting with the 2006 government decision that initially provided tax benefits, to the more recent changes in dividend and corporation tax that have shifted the financial advantages.
Through real-life scenarios and practical advice, we explore how significant life events, such as purchasing a home or supporting a family, can influence your financial decisions as a dental professional. Discover when incorporation might be beneficial, like leveraging a lower-earning spouse or investing in electric vehicles and property. Learn the importance of regular financial reassessments and how increased private pension contributions could be a game-changer for sole traders. Tune in for a thoughtful discussion that underscores the dynamic nature of career trajectories and financial needs in the dental profession.
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Disclaimer: All content on this channel is for education purposes only and does not constitute an investment recommendation or individual financial advice. For that, you should speak to a regulated, independent professional. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The views expressed on this channel may no longer be current. The information provided is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment, you should speak to a regulated, independent professional.
Hey guys, this is podcast episode that we really really, really pertinently and importantly and we need to prioritize and do. And the reason why is because, actually, once upon a time, when the whole onus was on shifting from being a sole trader to a limited company, that's not so much the case anymore and we are joined today by Mr Mike Bryan, accountant and specialist accountant to dentists, who's here to give us a hot take on why being a limited company as an associate may not be the most appealing thing in the whole wide world anymore, given the recent shifts whenever it comes to tax bands and tax percentages and everything along those lines. But of course, it's important to caveat everything we're about to say with the fact that we are contemporaneously speaking. On what date is it today? The 30th of July 2024.
Dr James:So things might shift and things might change, of course, in future for people who download this podcast as time goes on. So it is, of course, just important to corroborate everything that we've said today with the current tax situation. But, like I say, hot fast take from where we're talking right now. This information is relevant and it's very important to know. Mike, it's been too long since we've done a podcast together. Thanks.
Mike:James, lovely to be here. Thanks for the invite. Always nice to jump on these calls with you. Should I just do a quick intro?
Dr James:Some of some of your listeners may already I think I think we need a re-intro, you're right, because it's been too long, because I think it's been honestly like 100 episodes, since we've done one together. So re-intro would be lovely no problem at all.
Mike:So, uh, yeah, Mike, uh, Mike Bryan, uh, partner at humphrey and co accountants. Uh, we're general accountants. Um, do deal with all industries and taxes. However, we have very much a speciality in healthcare and, in healthcare, very much a speciality in dentists. So at last count, I think we act for something like 1,700 dentists in the UK. We deal with newly qualified dentists all the way up to corporates or mini corporates owning 30, 40, 50 practices and getting into business, buying and selling practices whether you should be a company or not Selling practices and thinking of taxes on retirement as well.
Dr James:Lovely, lovely. Thanks for that, Mike. So let's jump straight in with the subject matter at hand today Limited companies. Once upon a time well, how can I say this? It didn't always make sense, but let's just say the numbers were a lot more appealing than what they presently are. And actually there can be certain situations where once a limited company made sense from a tax perspective, it doesn't anymore. But I'm sure that you'll be able to divulge more on that today, Mike. So what I think a good place to start is what's changed.
Mike:For sure. Yeah, absolutely so. Let's just think about a brief history of limited companies and historically, for the last 15, 20 years in dentistry, incorporation has been a buzzword and people have always considered incorporation. And what we're going to touch on today, just to be clear at the outset, isn't principles, it's not practice owners. Okay, the. The difficulties of incorporating or disincorporating your dental practice are vast and not sufficient. There's not sufficient time to cover them at this webinar. Broadly because of contracts, staff contracts, nhs contracts, bank debt, freehold, goodwill, moving all of that stuff. It needs specialist and tailored advice. However, as an associate, it's much easier. You have a contract with a practice and whether you contract or your limited company contracts is a relatively easy thing. So, brief history 2006 was the first year that dentists were allowed to trade as limited companies. Limited companies have been around for way, way, way longer than that. Just the GDC did not allow dentists to trade as limited companies until 2006. They changed the dental law at that point in time.
Dr James:And can I ask just on that principals and associates could not trade as limited companies prior to that date? Oh, my goodness.
Mike:Yeah, yeah, yeah, yeah. So limited companies are still relatively new new in inverted commas for dentists, because they've only been around for not even 20 years yet. Uh, in terms of dentistry, um, there's always been an issue with nhs contracts and limited companies. Uh, principles, much more of an issue. Uh, I need some legal advice there.
Mike:Associates just I'm sure most people are aware, if you're an associate and you trade at a limited company and your NHS income goes through your limited company, you need to opt out of superannuation. You cannot put NHS income via a limited company and retain the right to your pension contributions. Certainly for England and Wales anyway. Scotland may be a little bit different, but I don't want to go into that topic of conversation right now either. So companies 2006 very much were preferred. The government have always hated the reason that people incorporate purely for taxes, so they've always wanted people to incorporate their business for really for limited liability, for protection purposes and the clues in the name of limited companies. The owners of limited companies have limited liability. So if that company fails, it gets sued, it goes bankrupt and the owners of it, the shareholders of it, have protection unless they've done anything illegal. But generally speaking, they have protection. They can't come after your car, your house, your personal assets.
Mike:2016 was a very important date in that the taxation of dividends went up. Prior to that, you could get some dividends out of the company a decent chunk of dividends out of the company at zero percent, and it was a very effective way of running a dental business. Then what's I mean? Obviously, that was that was a while ago now, um, but what's happened more recently is just over a year ago. Corporation tax has gone up, so in recent history, we've lived in a low corporation tax world. In the UK, 19%. It was the lowest of the G7 countries, as far as I'm aware, or one of them anyway. Now, from April 23, the percentage is between 19% and 25%. The way you work out that percentage is a bit complex, but if you have one limited company and you have no involvement in any other limited companies, then your tax will be 19 percent. If your profits are under 50 grand, they will be 25 percent. If your profits are over 250 grand, and if they're between 50 grand and 250 grand, then your tax will be between 19% and 25%. And what happened in COVID was there, was the people can remember this there was an increase to national insurance of 1.25% and that also got added on to dividends as well. But post-COVID the national insurance rate dropped back down. They removed that. However, they didn't remove it on dividends. So dividends have kind of almost sneakily been taxed at a higher rate because people kind of think it went back down. They didn't. So dividends went up by another 1.25 percent reasonably recently, and then even more recently than that, in fact, in the last six months.
Mike:The Tory government, one of their final things was to reduce national insurance. National insurance is a tax that workers pay for, so self-employed people in the world of dentistry, and that has gone from nine percent to six percent, so it's three percent saving there. Now, if you combine all of them together, actually, if you look at your effective tax rate or the effective tax you'll pay as a limited company compared to a sole trader, you might be surprised to see that sole trader is now coming out on top. It is a might. Still, it's an if. It's unknown, because there's a few other things you need to you need to consider here. There's a few other things you need to you need to consider here and the things that your accountant should talk you through. Is that, if you need.
Mike:Let's say, let's imagine you're a young dentist, you're considering incorporation, you're earning let's call it the average associate earnings probably somewhere between 80k and 120k. Okay, um, if you need all of your money to live and when I say live I mean in your personal pocket so to live, so, and when I say live I mean in your personal pocket, so to live, so that's your house. House costs, your holiday costs, your food and drink costs, potentially your car costs, unless it's an electric car, which we'll touch on. But also, especially if we're looking at young dentists that are still living with parents and may well be thinking about buying their first home in the next 6, 12, 18, 24 months, that home will be a personal asset. That means you need cash in your personal pocket. So you need to plan this.
Mike:You need to look what happens in a career and when you need cash. You need cash at some point in your life in your personal pocket normally, to buy your home. In your life, in your personal pocket normally, to buy your home potentially to put perhaps children in private schools, perhaps travel the world, perhaps buy the bigger home or renovate the house. So you need to work out how much cash you need, and if you need all your cash because you're going to be saving up for a house, let's say, then actually being a sole trader right now is likely the better option for you compared to being a limited company. Increased accountancy fees that come hand in hand with running a limited company. Compared to being a sole trader, you will find that if your profits are around 80 to 120k, you're probably one to 3k worse off a year by being a limited company compared to being a sole trader and just to be clear, that's assuming you need that money most of it, yeah exactly, and this is this is the massive thing.
Mike:So, um, you know, some accountants can be um a bit lapsed when it comes to this kind of planning, and that you can, I can. I can tell you now that an associate that came to me that was earning 120 grand a year, that can live on 50 grand a year, would save tax as a limited company, because they're only extracting 50 grand a year. The next thing that you need to do and you need to consider is is what do you want to do with that surplus cash that's sitting in the company bank account? And if the answer for that is, well, I'm going to save it up and buy my house to live in. As I've talked about, that's personal cash you need to get that money out of the company. If, however and there's probably four things to consider if, however, your spouse is a lower earner generally, meaning they earn under 50 grand then there's potential to shift some of your dental income onto them via using a company, so they have shares in your company. They take a dividend for being a shareholder in your company. If you want to buy a dental practice and generally here we're talking buying a dental practice on your own and not buying into a dental practice. If you're wanting to buy into a dental practice and become a partner at an existing practice, you need to speak to the partnership first to see how they work before determining whether this can be, whether you should trade as a limited company and then find that sorryultimately buy to let properties. So again, properties that you want to invest, not that you want to live in, not that family members want to live in, properties that you will rent on the open market.
Mike:And then the final one has always been kind of again a bit of a buzzword for the for the last few years is electric vehicles, and I was actually looking at it earlier because the way electric vehicles work, you get this benefit in kind tax and that's going up. Okay, it's going up in the next couple of years. If we took a 50 grand electric vehicle and then put that into the incorporation comparison that I've been doing before this webinar, you will probably be about breaking, even if you need all your money and you're going to be getting an electric vehicle in the company name. So electric vehicle is a reason to consider incorporation, but it doesn't mean you should be a company. It's not as black and white as that.
Mike:Now, if you want one of the Audi e-tron 130 grand electric cars, porsche Takens or something like that, then yeah, you're going to save more tax because you're driving a more expensive electric car. But if you're thinking of a more modest electric car, even with the new tax rates, if that's the only thing you've got in in these four things so lower earning spouse, electric car, practice purchase, buy to let, property, investment then actually you may still be best as a sole trader and you may just consider making increased private pension contributions to control your tax, because that's that's the way that sole traders can really manipulate their taxes is by retirement planning and looking at investing in their pensions something that James and his comrades will have banged on about enough times on different podcast, I'm sure, uh, in investing and sips and all those fun things good stuff?
Dr James:well, listen, thank you for that, Mike, because it's certainly. How can we say what's a good word? Um it, uh, dishevels the, the wisdom, the universe, you know, the almost universal wisdom that we should all just go limited as soon as you can just just.
Mike:I think there's a couple of well one scenario that I've seen once or twice thinking about it. Um, at the time you know, if you go back three, three years, uh, if you're a fully private dental associate working full-time, limited company was right and someone might have just not revisited it in in the last few years. And actually you know when life gets in the way and sometimes you know earnings when you're a young associate. They go up, they go up, they go up and everyone thinks, all right, all of a sudden I'm going to be earning 200 grand in the next couple of years because this trajectory is going to continue when realistically it doesn't, it plateaus off. And then life gets in the way. You have a kid or two and actually you realise life isn't all about work and money and you value your work-life balance more and you see those profits plateau or sometimes even drop, certainly if you're thinking of childcare and work-life balance and just revisiting it can now be a trigger to speak to your accountant and say, look, is this still right for me?
Mike:I took on a new client recently who exactly this happened. She was earning 100k-ish and didn't need all of her money. She's now had a kid or two. She's now earning 60k because she's working three days a week. We've got rid of her limited company. We've put her back to a sole trader days a week. We've we've got rid of a limited company. We put her back to a sole trader. She's saved on accountancy fee. She's saved on complexity, um and an overall she's going to save on tax as well there we go, boom.
Dr James:So something to consider for the listeners of the podcast and, as you say, very specific circumstances in which it's worth investigating. Number one you have to be an associate of your principal. Generally, it includes things, yeah, but yeah, from what you've, what you're saying, uh, and then obviously it's within that little, that specific little bracket 80 to 120k, something along those lines and spending the majority of your capital yeah, and that's the main one profits.
Mike:Actually, you're going to find, if you need all of your cash and you don't have one of those four things we talked about, sole traders still going to be best. It's a weird situation right now and actually the more you earn you need all your cash the bigger the tax differential becomes. If you're earning 150 grand and you need all of your cash, you, as a sole trader, you're going to be saving five grand a year. I'm guessing it I haven't got numbers in front of me you'll be saving five grand a year in tax by being a sole trader. You're going to be saving five grand a year. I'm guessing it. I haven't got the numbers in front of me You'd be saving five grand a year in tax by being a sole trader compared to being a limited company.
Dr James:There you go, boom. Well, listen, Mike. I think that might be a very nice thing to round off on, given that we've given everybody who is listening a really good understanding of how things have shifted a little bit of an update, so to speak. Unless you feel there's anything more to add, not that I can think of.
Mike:You touched on the only. The final thought, um is that we don't do have a labour government. Uh, there is a budget coming in october and so watch this space that they've promised not to play with the big taxes, but I'm sure there'll be some tweaks and some differentials and some other things in there that everyone needs to be aware of.
Dr James:Cool, good stuff, Mike. Thank you so much for your time, Mike. If anybody wants to reach out to you off the back of this podcast today, how would they be best off finding you?
Mike:Yeah, check my webpage probably. So the firm again is Humphrey Co.
Dr James:It's www. humph. co. uk founder bar, or also worth mentioning that Mike is on the Dentists Who Invest facebook group. That is Mr Mike Bryan. You'll be able to find him in the member section, should you want to speak to him one-to-one, Mike. Thank you so much for your time. As ever, let's not be strangers as much as last time. Let's get you back on much, much, much sooner. Maybe we can get another hot take on how things might shift, pending the Labour government and what they say in September time. That could be fun. Yeah, let's do that. Boom, let's lock it in. All right, Mike? Well, listen, I shall hopefully speak to you then and in the meantime, have an absolutely smashing day. We'll see each other soon. Thanks, buddy, take care.
