Are you on top of your taxes?
Working within healthcare made me realise a few things, it’s a satisfying but demanding profession and leaves you with very little time to stay on top of your finances. That’s why, as the founder of a specialist medical accountancy company, I’m offering 6 tips to help reduce your tax bill from today!
1) Sole Trader or Limited Company?
When working as a locum, the norm is to work as a sole trader, meaning you’ll be responsible for paying your own tax and national insurance (NI). You’ll have to keep the companies house and HMRC informed of your financial position on a regular basis. If you’ve just started as a locum, you must notify HMRC within three months of starting or you could be liable for a financial penalty. If you’re planning to work part-time, or expect your turnover to be under £42,000, you’re better off working as a sole trader, the most tax efficient way to do so would be to avoid umbrella companies and keep detailed records of your expenses for your self-assessment at the end of the tax year.
If your expected/current turnover exceeds £42,000 then you should consider forming a limited company, if you haven’t done so already. Working through a limited company will require around 15-20 minutes a month in administration tasks, but the advantages of having one is that it will save you thousands. For limited companies, directors must keep company accounts up-to-date, submit annual returns to companies’ house and keep a track of all financial expenses and invoices. It’s generally advised to appoint an accountant, who’d cost far less than paying an umbrella company and would be able to perform calculations on the spot to show you exactly how much you can save going limited.
2) Record-Keeping is Key!
Expenses reduce your tax bill the most. Fact.
Business expenses are subtracted from your income to calculate your taxable profit to ensure you’re paying the right amount of tax. The ones you can claim on are called “allowable expenses”, and you should get pretty familiar with them because those are the key to saving thousands at the end of the tax year. The best technique is to keep all your physical expenses in one single folder or take a photo of your receipts and save them on your phone or computer.
With over 35+ allowable expenses to claim for, you can claim mileage, travel costs, subscription fees, office costs and more. You can find more details on HMRC’s website or an abbreviated version on our website here
3) Use a Business Account
If you’re working or planning to work through a limited company, you must set up a business account; as firstly, it’s a legal requirement and secondly as you’ll be processing a lot of transactions, there will be an accurate log of your income and expenses. In addition to this, you will be able to take out business loans and simplify your dealings with HMRC substantially.
As a sole trader, it's not a legal requirement to have a business bank account but definitely good practice as it adds professionalism, helps you prepare for your self-assessment at the end of the tax year and doesn’t violate your personal bank account term and conditions.
4) Payroll can save you thousands
If you are trading through a limited company, one of the best ways to reduce your tax bill is by running payroll. As a director, payroll can be run for you up to your personal allowance of £11,850 for the 2018/19 tax year which can be claimed as an expense in your company accounts. This expense can reduce your profits by £11,850 which in turn will save you £2,252 in your corporation tax bill. Running payroll for you as a director will not affect your personal self-assessment return, as the salary run will be up to the personal allowance and no extra tax will be due on that.
Further tax can be saved if you have a partner in the company, if payroll is run for more than one person; the employer is eligible for employer’s allowance. This is an allowance that you get until you reach £3,000 employers’ national insurance in that tax year. Claim this in your company accounts and see your tax bill cut even more!
5) Invoice correctly
Making sure your figures match up is the most important part of being a locum. You should always show the correct amount of VAT on your invoices, and if the VAT amount is incorrect, then you’ll be responsible for accounting the higher sum.
For example, if you charge £600 plus VAT of £120 but your invoice shows VAT of £210 to a client. HMRC will still expect you to pay the incorrect VAT of £210 shown on the invoice. However, the client being charged (purchaser) can only claim back the amount of VAT they should have been charged (i.e. £120) so they will lose out by £90.
Always make sure your invoices have the following details:
- Company name, address and registration number
- Date of Invoice
- Client Name and Address
- VAT Number
- Description of services supplied (and quantity if applicable)
- A sequential number based on one or more series which uniquely identifies the document
- Gross total amount payable, VAT charged and Net amount before VAT
Some agencies may operate a “self-billing system” whereby an agency create an invoice for you based on the work you have done for them. If this happens, you do not need to formulate an invoice for the agency and this reduces administrative tasks as a result. However, it is vital that you make sure VAT calculations and accounts are made in line with the self-bills.
6) A good accountant pays for themselves
A good accountant will always fish out expenses you didn’t know you could claim for, keep an eye on your income and proactively call you to advise you on how you can cut your tax bill. One thing to consider is not the cost of the accountant themselves, but the savings they could make you. They should be able to perform real time calculations and show you how much you can save as a sole trader vs a director in a limited company. If they can’t, chances are, they won’t save you much going forward. If you ever need an accountant, one that’s experienced and already serves the healthcare industry, then you can use Accounts 4 Healthcare, the healthcare your accounts needs. Get in touch with one of the Clarity Locums team who will refer you today - see how much you can save!
Author - Suraj Davdra (MPharm) in collaboration with Clarity Locums