Trading structure

Author: Ian Tongue, Sandison Easson

When starting in private practice, how you are structured for tax purposes is an extremely important decision. Picking the most appropriate trading structure for your individual circumstances will ensure you are tax efficient and maximise the return on your hard efforts. This article looks at the more common trade structures adopted for private work.

The basics

If you are carrying out work as an individual, you are by default self-employed or a sole trader. This trading method is the easiest option, as the business is effectively just an extension of your personal affairs. Accounts are normally prepared, and the trading figures are disclosed under a separate section of your Self-Assessment tax return form every year.

A common alternative to self-employment is trading as a limited company. A limited company is a separate legal entity from you personally and is deemed to trade independently of you. A limited company prepares accounts in a prescribed format under company law and prepares a separate tax return to you as an individual. It also pays tax separately from you as an individual.

A partnership is also a relatively common trading structure and is usually a partnership between the consultant and one or more others (usually their spouse). This operates mainly in the same way as the sole trader option, but the profits are split between the partners in a pre-agreed percentage. 

Sole trader

Being a sole trader is the path of least resistance when it comes to accounting and tax, and all you really need to do is register with HMRC, have a basic accounting system, and off you go. Many consultants start out as a sole trader, particularly if their private earnings are at the lower end of the spectrum, but it can often be a steppingstone to other trading structures later.

The sole trader option requires annual accounts to be prepared. The taxable profit calculated from this is added to your other earnings and disclosed on a self-assessment income tax return.

National Insurance on your taxable profits is also payable via your tax return (assuming you reach the earning threshold for payment, which is just under £10,000). An additional National Insurance contribution is also made, but this is a fixed amount of just under £160 for the year.  

In England and Wales, the income tax rates payable on your self-employed earnings will depend on any other money earned, but in principle the following rates apply:

Basic rate taxpayer (earnings from £12,571 to £50,270)	20%
Higher rate (earnings from £50,271 to £150,000)	40%
Additional rate (earnings over £150,000)	45%

The above rates apply to 2022/23 and up to 2025/26 at the date of writing. 
For Scottish taxpayers, the rates are:

Starter rate (earnings between £12,571 - £14,732)	19%
Basic Rate (earnings between £14,733 - £25,688)	20%
Intermediate rate (earnings between £25,689 - £43,662)	21%
Higher rate (earnings between £43,663 - £150,000)	41%
Top rate (earnings over £150,000)	46%

One very important earnings ‘zone’ that can result in an unexpectedly high amount of tax being payable is between £100,000 and £125,140. This zone is where your tax-free earnings – known as your personal allowance – are gradually removed. The allowance normally provides you with the first £12,570 tax-free, but this goes down by £1 for every £2 of income above £100,000, until it goes down to zero.

The effect of this is to add 20% to the 40% official income tax rate, creating a rate of 60%. This earnings zone is a painful place to be tax wise and is often a driver for considering alternative trading structures.

Limited company

A limited company is a more complicated trading structure which provides significant flexibility and tax planning opportunities. A company prepares accounts annually, along with a corporation tax return, and tax is paid within nine months of the financial year end, which can vary from business to business.

Corporation tax is paid on the taxable profit calculated and is not reflected on your personal tax return. Therefore, if you did not extract any money from the company, no income would be shown on your personal tax return.

Extracting the profits in a tax efficient way is a key part of the decision making here and an accountant is best placed to assess your individual circumstances. The optimum strategy depends on your individual circumstances, but it is common to extract money as a combination of salary and dividends. A salary is paid for services as a director or employee and is a tax-deductible expense for the company, whereas a dividend is a distribution of profits after corporation tax has been paid. 

Partnership 

A traditional partnership is a business where the profits are allocated and distributed to more than one person. The tax treatment is very similar to that of the sole trader, with the main difference being an additional tax return for the partnership which discloses how much each partner has earned, and this is reflected on the individual partner’s tax return.

Partnerships can work very well from a practical administration perspective and for tax efficiency, particularly if both partners are actively involved in the business. 

Another form of partnership exists, referred to as an LLP, which is a limited liability partnership. An LLP is hybrid of a traditional partnership and a limited company. The accounting requirements are similar to a company, but the tax treatment is that of a traditional partnership. This trading structure has historically been used extensively for consultants working together in groups and other joint ventures where shielding from additional risk is required.

Choosing an appropriate trading structure can be difficult and it is important to not just copy a colleague or friend, as their structure may not be appropriate for your circumstances. It is also important to note that your chosen trading structure may change over time due to changes in tax rates and/or legislation, so you should discuss your circumstances regularly with an accountant. When choosing an accountant, it is important that your full circumstances are considered, and that they can offer practical guidance for the medical sector as well as tax.  

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