Along with the new Contract, set to be fully implemented later this year, comes the opportunity for dentists to incorporate. There are a lot of factors to consider, & your personal situation will have to be analyzed carefully, before any decisions are taken.

Here, we aim to arm you with the basics, by breaking this topic down into 4 key questions, which may have been plaguing your sleep recently:

Incorporation means forming a limited company. This will be a separate legal identity from you, and your title will almost certainly change to a "director". Currently, you pay income tax & NI on all your taxable business profits & are then free to use as little or as much of it as you like with no further tax consequences. With a limited company, the business’s profits are not yours to enjoy until they have been officially distributed to you, by way of either salary or dividend or both.

This depends on factors such as your personal situation, profits, spending habits, future plans etc. For some, incorporation will result in considerably less tax. Incorporation is likely not to be beneficial for people who spend most of what they earn.

Limited companies pay corporation tax whose rates are considerably lower than income tax rates. However, changes were announced in the last budget, which mean significant tax increases for smaller incorporated businesses paying out dividends. If your company pays you a salary, it will be tax allowable from the company’s point of view, as will be the employer’s NI the company (as it is your employer) will suffer on it. Dividend payments to you are not tax allowable however. You (as an employee) pay income tax & employees NI on your salary, but will not suffer class IV NI as you did when you were self-employed. You will also suffer tax on dividends, but at more favorable rates compared to "earned" income such as salary. For this reason, many people opt for a low salary, taking the bulk of their income from the company as dividends. However a dividend can only be paid if your company has "net distributable profits", whilst a salary can be paid by even a loss-making company. The downside of a small salary is that as your pension contributions depend on your earned income (not dividends) you may not be able to contribute as much as you may like to your pension. However, there are ways around this. The fact that goodwill is tax deductible for companies is also a big plus point.

It will involve extra paperwork, including forms for Companies House, Company Returns, Accounts, (which will have to be available for public viewing), corporation tax, dividend accounting, PAYE on your remuneration etc. Your accountant should be able to help with this.

The way you take income from the company will have to be carefully planned, especially if your partner has a fairly active role in your business, which can lead to tax advantages. Perhaps the biggest change will be that the concept of "drawings" disappears. Other than that, & changing the business name (it must end in "Ltd.") there should not be too many other major changes.

When you transfer your business to a limited company in return for shares in it, this will lead to a capital gain, on which capital gains tax would normally be payable. However, in certain appropriate circumstances & with the help of an expert you should be able to reduce or defer this gain - or perhaps a bit of both!

Mac Kotecha (FCA) is a Chartered Accountant who deals exclusively with dentists and has been established for over 25 years. His company offers Accountancy, Taxation & Payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues. Contact him on 020 8346 0391 or go to www.specialistdentalaccountants.co.uk to learn more.