If you’re working for the NHS as a dentist (associate/performer), hygienist, technician, or therapist, and also have private clients, you’ve probably asked yourself whether you might be able to reduce your tax bill by registering as a self-employed sole trader or perhaps even setting up your own limited company.
As a dental professional, which one you choose could have a pretty significant effect not only on your personal tax obligations but also on your NHS pension entitlement. Before deciding on any changes to your contractual arrangements or employment status, it’s vital to contact the NHS Business Services Authority and the British Dental Association to understand how any changes to your contracts and employment status affect your NHS pension entitlement. The NHS pension scheme, despite recent amendments, is still a very generous ‘defined benefit’ scheme that can be an excellent way to save for your retirement. You may require further, specialist advice, about your retirement planning and pension based on your individual circumstances.
Here at Crunch, we’ve been supporting over 10,000 members of the self-employed and small business community, including dentists, to manage their business finances and meet their tax obligations for over ten years. If you'd like to find out the various ways Crunch can help you with your dental business, our Accounting for Dentists page has everything you need to know, and more.
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First things first: are you employed or self-employed?
Before we get to the exciting stuff, we need to establish some of the basics, starting with your employment status: are you an employee, or are you self-employed?
If you’re an employee, your income is taxed at source, your dental practice is responsible for paying your salary, with any tax due already calculated and paid to HMRC through a regular (usually monthly) payroll – this is known as Pay As You Earn (PAYE).
If you’re self-employed, you’ll operate as either a sole trader or a limited company, and you’ll be responsible for paying your own taxes. Many associate dentists, hygienists, therapists, and dental performers are self-employed contractors.
There are a number of reasons why self-employment may appeal, such as greater flexibility, independence, and the possibility of reducing the amount of personal tax paid (and potentially the tax bill of the dental practice).
There’s usually a relationship between the self-employed contractor and the practice which involves the contractor making regular monthly payments to the practice owner for the use of premises, certain equipment, materials, and staff.
As a rule of thumb, HMRC’s employment status manual says Dental Associates are usually self-employed as long as an approved British Dental Association [BDA] contract is in place, and the day to day working practises confirm it. An assistant dentist is usually employed as their work is supervised.
Every working situation can be different and we always recommend you seek specialist advice based on your contract and working practices.
There are some simple tests you can apply to determine whether you’re an employee or self-employed, such as whether your work is controlled and directed by your client, whether you can provide a ‘substitute’ to carry out your contract or whether you need to undertake work when asked to do so. From 6th April 2021, it is the responsibility of your end-client (usually the dental practice) to determine your employment status for your private work, though there are exemptions for small companies (who are your end-client). Any dental practices you work for already have to make a similar employment status assessment for any NHS work you carry out through your contract with them.
You can find out more about your employment status, and the government’s rules in this area (known as ‘IR35’) at our IR35 hub.
As a self-employed dental professional, you should have clinical freedom over how to treat your patients and to devise your own treatment plans. You should also be able to send a locum in your place if you can’t perform the work required for any reason. This is a strong indicator that you’re self-employed, though you’ll need to ensure the contract between you (or your limited company if you have one) and your end-client includes a clause saying your employment status is self-employed and you must ensure your working practices reflect this.
If HMRC begins an enquiry into your employment status, they will always look at the contracts you have in place as well as your actual working practises.
Speaking of contracts, it’s important that you have a contract between yourself (and your limited company if you have one) and the practice or practices you provide services to. The British Dental Association has template contracts available for dental associates who are members of the organisation.
Other factors that indicate self-employment include:
- Paying for professional indemnity insurance cover
- Not being paid holiday pay
- Sharing responsibility for laboratory costs
- Having a ‘minimum hours of work’ clause, rather than a ‘required hours of work’ clause
- Replacing old/damaged equipment out of your own pocket.
Why does it matter whether I’m an employee or self-employed?
The main reason this distinction is important is the impact it has on your tax bill. As we mentioned previously if you’re an employee, your tax is deducted at source by your employer through their payroll system, and you don’t need to worry about making any further deductions. If you’re self-employed, you need to handle your tax payments and any other deductions (such as pensions) yourself.
If you’re self-employed, you’ll either operate as a sole trader or a limited company, or a combination of both, and you’ll be responsible for paying your own taxes.
Does it matter if I do NHS work, private work, or a combination of both?
Most NHS dentists working in dental practices are self-employed contractors, although it’s possible to be employed by the NHS if, after your foundation training, you choose to work as a core dental trainee. You’re also employed directly by the NHS if you work as a salaried dentist in community dentistry, or if you’re a specialist dental consultant in a hospital. You may even be employed by the NHS but also do additional work as a self-employed contractor in private dentistry.
If you decide to work in a dental practice as a self-employed contractor, such as an associate/performer, you may provide some NHS dentistry and other private work. In this case, it’s likely that you’ll be a self-employed sole trader for your NHS work, and you then have the choice to carry out private work either as a sole trader, or work through a limited company.
While this can make your accounts and tax affairs a little more complicated, the good news is that you could reduce the amount of tax you pay overall, and maintain your NHS pension entitlement. However, as stated in our opening paragraphs, you should seek specialist advice about your NHS pension based on your individual circumstances.
Other dental professionals, such as dental hygienists and dental therapists may be self-employed or employed directly by a dental practice. Dental nurses in the NHS and dental support workers are usually employees as their work is generally supervised by others. However, there are exceptions if the individual works for a number of private clients when they may be self-employed. Advice should always be taken if you are unsure of your employment status.
NHS pension entitlement
As highlighted throughout this guide, you should always take advice about your employment status and any impact this has on your NHS pension based on your individual circumstances.
In general, if you’re self-employed and want to keep making contributions into the NHS pension scheme, you need to carry out your NHS work as a sole trader. If you work through a limited company, the company cannot make any contributions to an NHS pension.
You’ll make pension contributions based on your NHS work, at a rate that is set by the NHS pension scheme which depends on your annual pensionable earnings or whole-time equivalent if you work part-time.
There are circumstances where, if you carry out private dentistry work, you can perform work on those private contracts through your limited company, and still work on NHS contracts as a sole trader. You may be able to continue to make contributions to your NHS pension, though you should take specialist advice on this.
Sole trader, limited company, or both: what’s best for you?
If you’ve made it this far, it means you’re in charge of managing your tax payments, such as National Insurance Contributions (NIC) and Income Tax. The question now is whether you’re better suited to life as a sole trader, a limited company, or both.
What is a sole trader?
If you’re a sole trader, you run your own business as an individual and are self-employed. You can keep all your business’ profits after you’ve paid tax on them, and you’re personally responsible for any losses your business makes. You’ll need to follow certain rules on running and naming your business and you’ll need to register with HMRC to let them know you’ll pay tax through an annual Self Assessment.
If you’re looking for more information on what a sole trader is and how to become one, check out our “What is a sole trader?” Knowledge article.
What is a limited company?
A limited company is a separate legal entity that you can form to run your business – even if you’re a one-person business. As a director, you’re responsible for any legal and financial decisions the company makes. The company’s assets and liabilities are completely separate from your own personal finances.
You may wish to become a limited company if you solely undertake private work, or if your average yearly income from private work is over £35,000 as it’s generally more tax-efficient, giving you higher take-home pay and more flexibility over your tax planning. Your company can make pension contributions into a non-NHS private pension on your behalf. However, as highlighted elsewhere in this article, your own limited company cannot make contributions into your NHS pension and you should always seek specialist advice on this.
If you decide to set up your own limited company, you’ll be a director and a shareholder of the business. You can be paid a salary and/or dividends from the company’s available profits. The company must make various annual returns and file annual accounts with statutory bodies such as Companies House and HMRC. It’s your responsibility as a director of the company to ensure this happens. There are a number of other deadlines and responsibilities that we explain in our handy article. We’ve also got another article outlining the main advantages of being a limited company.
The sole trader route is usually the best option for those looking to work on a self-employed basis for the NHS. The limited company option is usually best for private contracts or when working for non-NHS and private practices. However, if you’re working for both, there’s nothing stopping you from being both a sole trader and a limited company according to the contracts you want to work on.
If you’re still unsure which business structure is right for you, you can always call our team of friendly, expert advisors who will be happy to help you reach a decision.
Our Crunch special offer can help dentists, hygienists and therapist in the dental industry
There’s a range of options if you are a dentist (associate/performer), hygienist, technician or therapist in the dental industry. At Crunch, whatever route you choose, we provide expert accountancy advice alongside our online software which enables you to automatically draw up invoices, easily record expenses and have a real-time snapshot of your income and expenses. By keeping all your accounting needs in one place, life as a self-employed sole trader or limited company director is surprisingly easy.
We have a special offer for clients in the dental industry: if you decide to work as both a sole trader and a limited company (as you’ll be working on both NHS and private work), we’ll give a 10% discount on the combined monthly price.