Setting up a limited company, often called a personal service company or PSC, is one of the first questions a busy locum doctor asks. The honest answer in 2026/27 is that the locum doctor limited company pros and cons turn almost entirely on one thing: your IR35 status. Get that right and a company can be efficient. Get it wrong and you carry the running costs of a company while a fee-payer deducts tax before the money ever reaches it.

This guide weighs the genuine advantages and disadvantages for a freelance locum, using current rates and explaining where the popular tax-saving story breaks down. It is general information, not personal advice. This page focuses on the locum PSC decision specifically. If you are a GP practice owner or a consultant looking at incorporating private work, the trade-offs differ, so see GP limited company tax benefits and drawbacks and medical practice incorporation step by step instead.

What a Locum Doctor Limited Company Actually Is

A limited company is a separate legal person that contracts for your locum work, invoices the hirer or agency, pays corporation tax on its profit, and pays you through a mix of salary and dividends. You become both a director and a shareholder. That is different from being a sole-trader locum, where there is no intermediary and you simply declare your profit on a Self Assessment return.

The distinction matters because the intermediary is exactly what brings the off-payroll working rules (IR35) into play. A sole-trader locum has no company in the chain, so IR35 does not apply at all, and status is judged on the ordinary employed-versus-self-employed factors. The moment you put a PSC in the middle, IR35 has to be assessed on every engagement.

The IR35 Question Comes First

Before any tax-saving claim is worth a second look, you need to know whether your work is inside or outside IR35. This is the single most important point on the page, and it is why our deeper locum doctor IR35 guide is worth reading alongside this one.

Who decides your status, and when

Crucially, for most NHS work the locum does not decide their own status. The decision sits with the hirer or fee-payer:

  • NHS Trusts and other public-sector bodies: since 6 April 2017 the public-sector hirer (or, in an agency chain, the agency as fee-payer) determines your status and operates PAYE and NIC on any engagement it treats as inside IR35.
  • Medium and large private-sector hirers (private hospitals, larger clinics): since 6 April 2021 the hirer determines status, issues a Status Determination Statement (SDS) with its reasons, and the fee-payer deducts tax on inside-IR35 work.
  • Small private-sector clients (within the Companies Act small-company thresholds): the old rule survives, so your own PSC decides its IR35 status and accounts for any deemed payment itself.

You can challenge a determination through the client-led disagreement process, but you cannot simply overrule it. A locum working across several hirers can quite legitimately hold a mix of inside and outside determinations at the same time.

Inside IR35 versus outside IR35: what changes for the company

Inside IR35 means the fee-payer pays your company net of PAYE and employee NIC, so the tax-efficient salary-and-dividend extraction that people incorporate for is simply not available on that income. You are taxed broadly as an employee on it, while still carrying the company's running costs. Outside IR35 means the company is paid gross and you extract profit in the normal way, which is where the planning value lives.

One point that is widely misreported: a 2024 change lets HMRC set off taxes the worker and PSC have already paid against a deemed employer PAYE liability in a settlement. That removes old double-counting in disputes. It does not change who decides status, who pays, or which engagements are caught. IR35 was not abolished, and the off-payroll rules were not repealed, so be wary of anyone who tells you otherwise.

Advantages of a Limited Company for a Locum Doctor

Profit retention and flexible extraction (outside IR35)

On work that is genuinely outside IR35, profit sits inside the company taxed at the corporation-tax rate rather than at your marginal income-tax rate. For the 2026/27 financial year the small-profits rate is 19% on profits up to £50,000, the main rate is 25% above £250,000, and marginal relief tapers between the two (an effective rate of around 26.5% in that band). You then choose when and how much to extract, which can smooth income across tax years and around the higher-rate and additional-rate thresholds.

Dividend extraction (with smaller savings than before)

You can take a modest salary plus dividends. From 6 April 2026 dividends above the £500 dividend allowance are taxed at 10.75% (ordinary rate), 35.75% (upper rate) and 39.35% (additional rate, unchanged). These rose from 8.75% and 33.75% in 2025/26. Dividends still escape National Insurance, but the rate rise has narrowed the gap, so the dividend story is less compelling than it was a few years ago.

Family-shareholder and asset-protection planning

Where a spouse genuinely works in the business on commensurate pay, the company opens up some shareholder and remuneration planning, and limited liability gives a degree of separation between business and personal assets. Employer pension contributions paid by the company are deductible for corporation tax on a paid basis and carry no NIC, which can be a useful route to fund a private (defined-contribution) pension, within your annual allowance.

Disadvantages of a Limited Company for a Locum Doctor

The NHS pension you give up (often the deciding factor)

This is the cost most incorporation pitches gloss over. A limited company cannot hold an NHS contract, and income routed through a company is not NHS-pensionable. Dividends build no NHS pension at all. By contrast a freelance sole-trader locum can pension eligible NHS work through the GP Locum forms A and B route, accruing in the defined-benefit 2015 NHS Pension Scheme (1/54th of pensionable earnings each year, plus revaluation). Giving up guaranteed defined-benefit accrual for a modest corporation-tax saving is, for many locums, a poor trade. Any incorporation saving must be set against the pension accrual lost. See our NHS pension contributions and tax relief guide for how the annual allowance (£60,000 in 2025/26, tapering where threshold income exceeds £200,000 and adjusted income exceeds £260,000) interacts with all of this.

Inside-IR35 work strips out the saving but keeps the cost

As above, if your engagements are inside IR35 the fee-payer has already deducted PAYE and NIC, so the company offers little or no tax advantage on that income while you still pay for accounts, returns and bookkeeping. Many NHS Trust and framework-agency placements fall here, which is why incorporation so often disappoints clinical locums whose work is overwhelmingly NHS.

Administrative and compliance burden

A company must file annual accounts and a corporation-tax return, run payroll for your salary, keep proper records and meet filing deadlines, and most locums need an accountant to do it. As a director you also take on statutory duties. By contrast a sole trader files one Self Assessment return. Worth noting: a company is out of scope of Making Tax Digital for Income Tax (MTD for ITSA is income tax, not corporation tax), whereas most full-time sole-trader locums are in scope from 6 April 2026 once qualifying income exceeds £50,000 (then £30,000 from April 2027 and £20,000 from April 2028).

The director's loan trap

Because a one-person medical company is a close company, taking money out as a loan rather than salary or a properly declared dividend triggers a section 455 charge if the loan is still outstanding nine months and one day after the year-end. The charge tracks the dividend upper rate: 33.75% on loans made in 2025/26 and 35.75% on loans made on or after 6 April 2026. It is refundable once the loan is repaid (under section 458), but the relief is deferred, not immediate. It is an easy and expensive mistake for a locum who treats the business account as a personal one.

VAT: Usually a Non-Issue, but Know the £90,000 Line

Most clinical locum work is the supply of medical care by a registered practitioner and is exempt from VAT, and exempt income does not count towards the VAT threshold. You only need to register if your taxable (non-exempt) turnover exceeds £90,000 in any rolling 12 months (the threshold since 1 April 2024; the deregistration threshold is £88,000). Taxable income for a doctor typically means work without a therapeutic purpose, such as purely cosmetic procedures, medico-legal and expert-witness reports, and some occupational-health and administrative services. Pure clinical patient care, NHS or private, does not push you over the line, so most locums never register at all.

National Insurance and Mileage (Sole-Trader Comparison Points)

When you compare a company against staying a sole trader, two 2026/27 figures matter. A self-employed locum pays Class 4 NIC at 6% on profits between £12,570 and £50,270 and 2% above that (the main rate fell from 9% on 6 April 2024). Class 2 NIC is no longer a required weekly payment from 6 April 2024 for profits at or above the small-profits threshold, where contributions are treated as paid so your state-pension record is protected. On business mileage between work sites, the HMRC approved rate is 55p per mile for the first 10,000 business miles in 2026/27 (it rose from 45p on 6 April 2026) and 25p per mile thereafter. Home to your first site is non-deductible commuting. For the wider list, see locum doctor expenses: what you can claim.

When Incorporation Actually Pays Off

Drawing it together, a limited company tends to make sense for a locum doctor when several of these hold at once:

  • your engagements are reliably outside IR35 (often private-sector, non-framework or genuinely independent work);
  • your earnings are high enough that retained-profit and extraction planning outweigh the company's running costs;
  • you do not rely on continued NHS pension accrual on the income you would route through the company, or you have weighed that loss and accepted it;
  • you want family-shareholder planning, retained earnings for reinvestment, or the separation that limited liability gives.

It tends not to pay off where most of your work is inside-IR35 NHS placements, where NHS pension accrual is a priority, or where earnings are modest enough that the admin cost eats the saving. In those cases staying a sole trader, or in some cases using an umbrella company for simplicity (usually at a higher overall tax and NIC cost), is often the better fit.

Making the Right Decision

The locum doctor limited company pros and cons are genuinely individual. The right answer depends on your IR35 status across your engagements, your earnings, and how much you value continued NHS pension accrual. The headline tax saving from a company is more modest than the marketing suggests, and the 2026/27 dividend-rate rise has trimmed it further, so the decision should be modelled, not assumed.

Our specialist medical accountants regularly help locum doctors model the company route against staying a sole trader, including the often-overlooked NHS pension cost. The best structure follows from your actual circumstances, not a general rule about company benefits.