Incorporating Your Private Medical Practice: Tax Analysis and Decision Framework

Asking the right question

Most discussions of private practice incorporation focus on whether it saves tax. That is the wrong starting question. The right question is: does incorporating this income, in this structure, at this income level, produce a net financial benefit when all consequences are accounted for including the NHS pension cost?

For many senior NHS doctors with significant private income, the NHS pension impact of incorporation reverses what looks like a tax saving on paper. The comparison model above provides the structural numbers. This guide explains what they mean.

The basic tax comparison

As a sole trader, private practice profit is taxed as income. A consultant earning £85,000 net private income on top of a £50,000 NHS salary faces income tax at 40% on most of the private income, plus Class 4 NIC at 6% (not 9%, which was the rate before 6 April 2024).

Through a limited company, the same income first attracts corporation tax at 25% (on profits; this model uses a flat 25% for simplicity, see the note on marginal relief below). After CT, remaining profits can be extracted as dividends, which attract dividend tax at lower rates than income tax for basic and higher rate taxpayers.

The comparison model uses 2026/27 dividend tax rates (from 6 April 2026, Finance Act 2026 s.4):

• Dividend allowance: £500
• Basic rate (10.75%): on dividends falling in the basic rate band
• Higher rate (35.75%): on dividends in the higher rate band
• Additional rate (39.35%): on dividends above £125,140

The total tax burden through a limited company is typically CT plus dividend tax plus income tax on the NHS salary. For many income combinations, this total is close to, or higher than, the sole trader total. The model above makes the comparison explicit for your own figures.

NHS Pension: the most important factor

This is non-negotiable and must be understood before any incorporation decision.

Company dividends are not NHS pensionable. A limited company cannot hold a GMS or PMS contract. When you incorporate your private practice income and draw it as dividends, you lose NHS pension accrual on that income for life.

The NHS 2015 CARE scheme accrues at 1/54th of pensionable pay per year. A consultant in the 1995 final salary scheme accrues at 1/80th of final salary per year. Either way, moving private income into a company permanently reduces the pensionable income base that drives accrual.

Over a 20-year career, a £50,000 private income that could have been pensionable at the CARE rate would accrue approximately £925/year of index-linked NHS pension (£50,000 / 54). At a 20:1 commutation valuation, the capital value of losing that accrual for one year is around £18,500. Across 20 years of incorporating rather than taking it as sole trader income, the forgone pension value could be £370,000 or more in today's terms, before inflation indexation.

This number can dwarf the annual tax saving the model shows. The tax comparison must always be weighed against the pension cost for your specific situation.

Corporation tax: the marginal relief caveat (F2)

The model uses a flat 25% CT rate to match the online calculator. The actual CT structure since 1 April 2023 is:

• 19% on profits up to £50,000
• Marginal relief between £50,000 and £250,000 (effective rate tapering to 25%)
• 25% on profits above £250,000

For a company with profits of £85,000, the effective rate under marginal relief is approximately 21.5%, not 25%. The flat 25% in the model overstates the CT cost, which means it understates the limited company advantage slightly at this income level.

For purposes of comparing structures, the directional conclusion is the same. For precise tax planning, your accountant will calculate the marginal relief position for your actual company profit.

Associated companies

If you own or control more than one company, or share control with others (for example, where a medical partnership has incorporated), the associated companies rules can reduce the upper and lower CT limits proportionally. This can move a company into the 25% band at lower profit levels than you might expect.

This is a significant trap for doctor groups that incorporate a joint private practice while each maintaining their own company. Get specific advice before that structure is set up.

Employer NIC on the director salary

The model shows a director salary equal to the personal allowance (£12,570). At this level, there is no income tax on the salary and historically no employee NIC either. However, from April 2025, employer NIC applies at 15% above the secondary threshold of £5,000.

A company paying a director £12,570 now pays employer NIC on £7,570 at 15%: approximately £1,136. This cost is borne by the company and reduces the profit available for dividend, but it is deductible for CT purposes. The model does not include employer NIC because it does not affect the headline income tax and dividend tax comparison, but it does reduce the net benefit of the limited company structure further.

Company running costs

A limited company requires annual filing with Companies House, a confirmation statement, and corporation tax filing. Accountancy costs for a company are higher than for a sole trader self-assessment. A realistic premium is £1,500 to £3,000 per year, depending on complexity. These are deductible for CT but represent a real cost that reduces the net advantage of the company structure.

Salary versus dividend extraction strategies

The model uses a director salary of £12,570 (the personal allowance) and extracts remaining profit as dividends. This is the standard approach for a sole director. Variations include:

• Salary to the NIC secondary threshold only (£5,000): removes employer NIC entirely but loses the NI credit for state pension purposes
• Higher salary: increases the income tax cost but may be NHS pensionable in specific circumstances (for example, if the company holds a sub-contracted NHS engagement)
• Pension contributions from the company: employer contributions are deductible for CT, not subject to NIC, and do not attract dividend tax; they are however subject to the annual allowance

Directors loan accounts and s.455 charge

If a director borrows money from the company and the loan is not repaid within 9 months and 1 day of the company's year-end, the company pays a s.455 charge to HMRC of 35.75% (from 6 April 2026, matching the higher dividend tax rate). The charge is repayable under s.458 once the loan is repaid, but the cash timing cost can be significant.

Overdrawn directors loan accounts are common in doctor companies where dividends are paid informally throughout the year before a formal board resolution. Keep your loan account in credit or bring it to zero before the year-end.

Making the decision

The model gives you the tax comparison. Before making an incorporation decision, you also need to know:

• Your NHS pension input amount and annual allowance position for the year of incorporation and subsequent years
• Whether your private practice income is growing or stable
• Your expected retirement date and the value of the NHS pension you have already accrued
• Whether your private work can legally be done through a company under your NHS contract and the regulations governing your specialty
• The one-off incorporation costs (legal fees, Companies House, restructuring) amortised over the years you expect to operate the company

The answer is rarely "incorporate everything" or "never incorporate." It is usually "incorporate at these income levels, from this date, using this pension strategy." That answer requires modelling your specific numbers with a specialist who understands both tax and the NHS pension scheme.