Imran Butt, partner at Centra Consultants, stressed that he is “not promoting locums work at lower rates via their limited companies”.

But he explained that locums working at a lower hourly rate through limited companies can gain more income after tax compared to locums working for a higher rate as sole traders.

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Mr Butt told C+D last week (June 8) that the “majority” of locums he works with “regularly earn above the hourly rate for a sole trader”.

However, he does sometimes recommend that locums work via their limited company “on the odd occasion where the hourly rate is higher as a sole trader”, he said.

The rate difference is usually only “a few pounds”, but taking the lower rate is “overall…more financially beneficial”, he added.

 

Fewer claimable expenses and higher taxes

 

Mr Butt explained that sole trader locums have “much fewer expenses that they can claim compared to a locum working through their own limited company”.

For example, the meal allowance is lower, the use of home expenses is much lower than office rent and they are not able to claim mileage unless they work in two branches on the same day and travel between them, he said.

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Meanwhile, sole traders pay tax at 20% and national insurance at 13.8% on income up to £50,270, with income above this taxed at 40%, he added.

In comparison, a limited company “only pays 19% [tax] on profits and the profits will be lower due to the additional expenses a limited company can claim”, as well as having no national insurance to pay, Mr Butt said.

 

How much better off could you be?

 

According to Mr Butt, a locum working through their own limited company at £45 per hour would be almost £4,000 better off per year than a locum working as a sole trader at £50 per hour with the same number of working hours and the same student loan plan.

He told C+D that the sole trader locum working at £50 per hour for nine hours a day, four days a week for 42 weeks would have a gross income of £75,600.

But accounting for expenses, taxes, national insurance contributions and student loan repayments, this results in a take-home pay of around £46,500 and an hourly rate of £30.81 after all deductions, he said.

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Meanwhile, the locum working through their own limited company earning £5 less per hour for the same amount of time would have a gross income of £68,040, he added.

With a gross yearly income of £7,000 more, “on the surface it would seem that a sole trader would be better off”, Mr Butt said.

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But his calculations show that after all deductions – which includes over £11,000 less tax than sole traders – the locum working via a limited company would see a take-home pay of around £50,000 and an hourly rate of £33.25.

Ultimately, the locum working through their own limited company is “£2.44 an hour better off after all deductions” than a sole trader, equating to a yearly figure of £3,689.28 for the hours worked, Mr Butt concluded.

See his worked examples in full below.

 

“Final nail in the coffin” for sole traders

 

The difference is “often even greater” because most locums will have a second employee in their company, further reducing their corporation tax, according to Mr Butt.

But even with only one employee, a locum working via their limited company pays “typically over £10,000 less in corporation tax and £2,000 less in student loan, resulting in more money in the locums’ pocket after all deductions and therefore a higher net hourly rate”, Mr Butt said.

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And he added that “the final nail in the coffin for the sole trader is payment on account”, where the government requires tax for the following year “upfront in two payments” on “money that has not even been earned yet”.

This happens “whenever the sole trader has a tax liability of over £1,000”, which is “always the case for a locum due to high hourly rates and low overheads”, he said.

Although this is “a credit payment towards the next tax year, it is still a financial burden a sole trader has to bear whereas a limited company only pays the tax due with no payment on account”, Mr Butt added.

 

Worked examples in full

 

Both examples below, provided by Mr Butt, assume that the locum has a plan two student loan and works the same number of hours, days and weeks.

Example sole trader:

A locum working as a sole trader commanding £50 per hour, working nine hours a day for four days a week for 42 weeks, would have a gross income of £75,600.

The average yearly expenses for a sole trader locum would be between £3,000-5,000 – much lower than a locum working via their limited company – which would mostly comprise of professional fees, some equipment and a small amount for meal allowance. Even taking the higher level of expenses, the income after expenses would be £70,600.

The tax breakdown for this would be as follows:

• £70,600 - £12,570 (tax-free allowance) = £58,030
• Basic rate £37,700 x 20% = £7,540.00
• Higher rate £20,330 x 40% = £8,132.00
• Income tax charged after allowances and reliefs = £15,672.00

Plus class four national insurance (NI) contributions:

• £38,362 x 9.73% = £3,732.62
• £20,330 x 2.73% = £555.00

Plus class two national insurance contributions =£163.80

Total class two and class four national insurance contributions due = £4,451.42

Plus student loan repayments (plan 02) = £3,897.00

Total tax, NI and student loan = £24,020.42

So, the take-home [pay] after tax is £70,600 - £24,020.42 = £46,579.58

Which works out to be an hourly rate of £46,579.58 / 42 weeks = £1,109.04 / 4 days = £277.26 / 9 hours = £30.81 per hour (after tax, NI and student loan)

Example limited company:

A locum working through their own limited company earning £45 per hour – £5 per hour less than the sole trader nine hours a day for four days a week for 42 weeks a year would have a gross income of approximately £68,040.

This is approximately £7,000 less gross yearly income, so on the surface it would seem a sole trader would be better off.

The average expenses for a locum working via their own limited company is £25,000-£35,000. This is comprised of a yearly salary of £12,000 and expenses such as mileage, meal allowance, office rent, professional fees, uniform, physio, health insurance and equipment.

Looking at the lower average expense figure of £25,000, this would result in income after expenses of £68,040 - £25,000 = £43,040.

The tax breakdown for this would be as follows:

£68,040 - £25,000 (expenses) = profit £43,040 x 19% = £8177.60 

Leaving post tax profit of £43,040 - £8,177.60 (corporation tax) = £34,862.40.

If all this was taken in the form of dividends then the locums’ self-assessment would be:

• Pay from all employments = £12,000
• Dividends from LTD = £34,862
• Total income received = £46,862
• Minus personal allowance = £12,570
• Total income on which tax is due = £34,292

Dividends from companies tax:

• Basic rate band at nil rate £2,000 x 0% = £0.00
• £32,292 x 8.75% = £2,825.55
• Income tax charged after allowances and reliefs = £2,825.55

Plus student loan repayments (plan 02) = £1,761.00 (less student loan payment due)

Income Tax and student loan due = £4,586.55

If we add the corporation tax and the self-assessment tax and student loan repayment it comes to £12,764.15

The difference in tax between sole trader and limited company is £24,020.42 - £10,239.90 = £11,256.27

In other words, a sole trader pays £11,256.27 more in tax than a locum working via their limited company, due to higher tax rate, higher student loan repayment, national insurance payments and fewer expenses.

Working out the hourly rate for the locum working via their limited company is different to a sole trader because some of the expenses that the limited company paid out were received by the locum into their personal account, such as salary, office rent, mileage and meal allowance.

Even though after expenses the LTD locum had £43,040, they still received a salary (£12,000) and office rent (typically £3,000), mileage and meal allowance, bringing their income to £68,040.

£68,040 - £5,000 (expenses paid out to others rather than the locum) = £63,040 minus the two taxes £8177.60 and £4,586.55 = £50,275.85 / 42 weeks = 1197.04 / 4 days = £299.26 / 9 hours = £33.25 per hour.

Therefore, a sole trader earning a gross income of £75,600 resulted in an hourly rate of £30.81 after all deductions, while a limited company earning gross 368,040 results in an hourly rate of £33.25 after all deductions.

Based on the above figures, the locum working through their own limited company is £33.25 – £30.81 = £2.44 an hour better off after all deductions, equating to a yearly figure of £3,689.28 (£2.44 x 9 hours x 4 days x 42 weeks).