The benefits and pitfalls when incorporating your medical practice
By Niall Hackett, Healthcare sector lead
Every year we set up in the region of 25 to 30 companies for medical consultants. Across our client base of many hundreds of consultants, between 60% and 70% are now incorporated, and the number keeps rising. However, incorporation isn’t automatically the right move for every consultant, and I regularly see people rush into it, or structure it badly, simply because a colleague has done it.
Incorporation only applies to your private income. Any public salary stays outside the company. Since the new public-only HSE contract was introduced, we’ve seen an increase in consultants moving into private practice, which in turn is driving more incorporation activity.
The pension and commercial case for incorporating
Self-employed consultants with taxable earnings above €100,000 pay a 3% USC surcharge that doesn’t apply if you incorporate and draw the money out through a company. On tax grounds alone, €100,000 is generally the point at which incorporation is worth examining.
As a self-employed individual, your pension contributions are capped by reference to net relevant earnings - currently €115,000 - with the maximum percentage you can contribute set according to your age. Someone aged 40 to 45 can contribute up to 25% of that figure. Through a company, pension contributions are linked to salary rather than to that earnings cap. If your annual earnings are €250,000, in principle you can put €250,000 into your pension in the same year.
That said, this needs careful planning. Pension funds are subject to a lifetime Standard Fund Threshold, currently €2.2 million and rising to €2.8 million. A self-employed consultant who consistently makes large pension contributions, particularly alongside a superannuated public service pension, can end up overfunded by retirement, and excess amounts are taxed at around 70%.
In order to have the ability to reinvest profits in the business, then a company is far more efficient vehicle for that purpose. After the close company surcharge a company can retain around 81% of excess profits to reinvest, whereas an individual after tax only has 45% to reinvest. Therefore, a company has a significant competitive advantage.
PAYE doesn’t suit everyone
As an employee of your own company, you pay tax as you go, month by month, rather than facing the annual cycle of preliminary tax and balancing payments that comes with self-assessment. For people who find that annual reckoning stressful, or who struggle to know what’s theirs to spend, that structure brings peace of mind. Where a spouse has a genuine role within the business such as a company director, company secretary or other employment, the company can pay the associated salary, pension and provide the small gift benefits.
Some consultants can’t live with paying tax every month. If your lifestyle and spending habits can’t support the monthly discipline that comes with running a company, incorporation may not suit you, regardless of the other benefits on offer.
Where incorporation goes wrong
When incorporating, the company structure and long-term plan are crucial issues to consider. One case we inherited involved a consultant whose wife, who had no active role in the practice, was a 50% shareholder in his company. When he came to exit the company, he expected them both to qualify for entrepreneurs’ relief, which provides for a 10% tax rate on qualifying profits taken out of a company. He met the conditions, but she didn’t, because she wasn’t an active participant in the business. This example highlights the importance of focusing on the exit scenario before allocating shares.
Retained profits taxed at 19% are still subject to income tax, or in some cases capital gains tax at 33%, when they’re extracted as income. That’s not a reason to avoid retaining profits; it’s a reason to have a clear plan, from day one, for how and when you’ll take the money out, whether that’s a steady drawdown over five or ten years or a longer-term strategy involving retirement relief on liquidation.
The bottom line
Incorporation can be financially beneficial for medical consultants. The savings are real, and I can demonstrate them to anyone considering the move. However, it should never be a reflexive decision because everyone else in your department has done it. It needs to be informed by your end goal, which determines how you structure ownership, fund your lifestyle, and one day extract the value you’ve built up.
How do I know if incorporation makes sense for my own circumstances?
Every consultant’s position is different, and the right structure depends on your income, your pension planning and your long-term goals. If you’d like to have a confidential conversation about what incorporation would look like for you, reach out to our Healthcare advisory team lead Niall Hackett.
