Should You Start a Limited Company? A Deep Dive for Medical Professionals

One of the most common questions we get at Medics’ Money is: “Should I start a limited company to save tax?” The answer, as with many things in finance, is: it depends on your personal circumstances. For some, a limited company can be a powerful tool for tax efficiency, wealth distribution, and even early mortgage payoff. For others, it could end up costing more than simply being PAYE.

To help navigate this complex topic, we spoke with Steve Nichols from Nichols Specialist Medical Accountants in London. Here’s what you need to know.

Why Limited Companies Offer Flexibility

The main advantage of a limited company is flexibility. Unlike a salary, which is paid monthly and taxed at source, a limited company allows you to:

• Choose who gets paid (e.g., yourself, your spouse, or family members as shareholders)
• Decide when to take income (timing dividends to avoid higher tax rates)
• Select how to take income (salary, dividends, loans, pension contributions, or capital distributions)

This flexibility is the cornerstone of tax planning with limited companies. It allows you to adapt to your unique family and financial situation.

Is There a Rule of Thumb?

You might hear rules like “if you earn less than £24,000, don’t bother with a limited company.” But Steve Nichols cautions against such generalisations. Sometimes, even modest private income can be efficiently managed through a limited company—especially if it helps you avoid high marginal tax rates or retain benefits like tax-free childcare.

For example, a doctor earning £90,000 from the NHS and £20,000 privately could use a limited company for the private income. This keeps their personal income below the 60% marginal tax rate and preserves eligibility for tax-free childcare.

However, compliance costs can outweigh benefits at lower income levels, so it’s always a case-by-case decision.

Ways to Take Money Out of a Limited Company

There are several ways to extract funds from a limited company, each with its own tax implications:

• Salary: Tax-deductible for the company, subject to National Insurance, and can help build state pension entitlement.
• Dividends: Paid to shareholders (who don’t have to work for the company), but giving shares to minors is usually not tax-efficient.
• Pension Contributions: The company can make tax-deductible contributions for employees (including family members who work for the company).
• Director’s Loan: You can borrow from your company, but it must be repaid. This is often used for things like paying off mortgages.
• Capital Distribution: When winding up the company, funds can be distributed to shareholders in a tax-efficient way.

Setting Up a Limited Company: How Hard Is It?

Setting up a limited company is straightforward and can be done online. Opening a business bank account is also much easier than it used to be. However, if you plan to involve family members or set up a family investment company, it’s wise to get professional advice on share structure and future tax implications.

Family Investment Companies & Money Box Companies

• Family Investment Companies: Useful for holding property or other assets, allowing you to pass value to family members with minimal tax liability if structured correctly from the start.
• Money Box Companies: These allow high earners to leave surplus income in the company, deferring tax and potentially paying a lower rate when funds are eventually withdrawn as a capital distribution.

Beware the “Cliff Edges”

Certain income thresholds can trigger significant tax consequences:

• £100,000 Cliff Edge: Income above this level means losing your personal allowance and potentially tax-free childcare, resulting in an effective 60% tax rate.
• £200,000 Cliff Edge: Exceeding this can trigger pension tax charges, reducing the amount you can contribute to your pension without penalty.

Using a limited company to manage private income can help keep your personal income below these thresholds.

Paying Off Mortgages with a Limited Company

With rising interest rates, many are using director’s loans from their limited company to pay off buy-to-let or even personal mortgages. You can pay interest to your company at a lower rate than a bank, and the interest is tax-deductible against rental income. However, there are cashflow and tax considerations (like Section 455 tax) to be aware of.

Employing Family Members

You can employ family members in your company, but they must actually work for the business and be paid a commercial rate. This is a legitimate, HMRC-accepted way to distribute income and build pension entitlements for non-working spouses.

Final Thoughts

There’s no one-size-fits-all answer to whether you should start a limited company. The right choice depends on your income, family situation, and long-term goals. Tried-and-tested strategies like family investment companies, money box companies, and director’s loans can offer significant tax advantages—but only if used correctly.

If you’re considering any of these options, consult a specialist accountant. For more information, visit nicholsmedical.co.uk or email Steve at [email protected].

This post is based on a conversation with Steve Nichols on the Medics’ Money podcast. Always seek professional advice before making financial decisions.