Setting up a company to capture income from private practice can have significant financial benefits for medical professionals. Brian Fallon FCCA, CTA, Director of DHKN Medical, looks at how this can work best.
For over 10 years medical professionals have been able to reduce the taxation on their income from private practice by establishing a company to run that part of their practice.
The introduction of the new Sláintecare contracts for those working in the public sector offers some further opportunities for medical professionals to also have private professional income which would typically be taxed at the highest rate of income tax for an individual.
Incorporating (i.e. setting up a company) for this practice income can help reduce the tax on this income while providing opportunities for better pension planning and improving cash flow.
BENEFITS OF INCORPORATION
The three most obvious advantages for a medical professional are:
- A significantly lower rate of tax for profits retained in the company compared to the top personal rate.
- A more favourable pension environment for pension investments.
- Improved cash flow in the company can facilitate debt management, future investments, etc.
Corporation Tax Rate Verses Personal Tax and Levies
The standard corporation tax rate is 12½ %. For a professional services company which is a closed company (i.e. a company controlled by five or fewer people) there is an effective surcharge of 7 ½ % of undistributed income. This is an effective tax rate of 19%.
The effective top tax rate, including PRSI, USC, etc., for an individual is about 55%.
The tax saving is about 36% or €3,600 for every €10,000 net income retained in the company.
To avail of this low rate, the money must be left inside in the company and is not available for personal use. It can however be used to acquire investment or placed on deposit.
If the profit left in the company is subsequently taken as salary, PAYE/PRSI/USC is payable at the full rate. If the funds are left in the company long-term they can be extracted at retirement or death with a much reduced tax rate or, depending on the circumstances, no additional tax.
Improved Pension Contributions
For a self-employed person pension contributions are restricted to a percentage of income depending on age and is also restricted to a maximum pensionable income of €150,000. Thus, for a person of 60 years the maximum contribution is €150,000 @ 40% = €60,000.
The position for a company director is totally different. As an employee of their own company, the company can make significantly higher pension contributions on the director’s/employee’s behalf. These contributions are not restricted by the age-related contribution level or the income contribution cap that restrict personal pension contributions.
The lower rate of tax paid on earnings retained in the company means there is more cash available to the director(s) i.e. the consultant.
The retained profits can then be used to acquire premises/equipment, finance loan repayment, make investment, etc.
MAKING THE MOST OF THE OPPORTUNITY
To get the most out of this structure a consultant should spend some time considering their present financial position as well as their medium and long-term financial goals. They will also need to understand the different requirements of being the owner and director of a company.
DHKN Medical has helped hundreds of medical and dental professionals to manage their tax affairs, reduce tax costs and avail of investment or pension opportunities, all of which helped them meet their longer-term goals for them and their families.