Should You Locum Through A Limited Company in 2023? Answering Your Key Questions
Once you've made the decision to locum during your F3 year, you'll then have to decide how you want to be paid. These days, it's becoming much less common for locum doctors to be paid through a limited company within the NHS, especially at more junior grades.
Most locum doctors will be paid through PAYE, where you’re paid in a similar way to a normal employee by each Trust, with tax, National Insurance, and pensions deducted automatically by your employer. But we do still have many locums asking for advice about working via a limited company, which involves setting up a business and contracting yourself out for work that way.
In this article, we discuss the pros and cons of locuming through a limited company, as well as answering the key questions you’ll be thinking about when deciding if it's the right approach for you to take.
Firstly, how does it work if you get paid through PAYE?
Just to ensure you understand all the options, if you’re getting paid through PAYE then you’re set up as a temporary employee with the payroll of each Trust you’re working at. This is called a “direct engagement” where the Trust pays you directly and the locum agency is not involved.
Your payroll therefore works in a similar way to permanent employees, in that your tax is calculated through PAYE and is automatically deducted from each payslip, as well as your National Insurance and student loan contributions. You can find out more about payslips and how to identify any errors in our article 'Decoding your locum payslip'.
What are the pros and cons of working through PAYE?
- Your tax, National Insurance, and student loan contributions are automatically deducted so there's no complex accountancy to worry about.
- You could sometimes be paid weekly by the Trust (but not always).
- You'll have the ability to opt in to an NHS pension.
- Your income tax will be deducted at the standard personal tax rate.
- You can only claim the same expenses as permanent employees can.
- You could be put on to an incorrect or emergency tax code, meaning you would pay too much tax and have to later re-claim.
How does working through a limited company differ?
To bill via a limited company, you have to set up your own business, of which you will be the director. You would then bill the Trust via your limited company for the hours that you work, so you set your hourly rate as agreed with the Trust.
Lots of locums used to use this option because it was a method of having more control over things such as salary, dividends, and a private pension, which could potentially be more tax-efficient overall. You could also claim business expenses through the company.
However, since 2017 under the IR35 rules, Trusts now have to examine your contract to decide if you, as a worker, have the “hallmarks of an employee.” This means that a PAYE and National Insurance contribution liability arises. This eventually means, in most cases, that locums are treated as if they were employees, and therefore your company’s income would be treated as your individual income. That means it would be subject to income tax and National Insurance deductions.
For this reason, most locums choose not to work through a limited company nowadays. But there are still some circumstances where locums would be considered to operate outside of IR35. Examples of this include locum GPs and locums in the private market.
What are the pros and cons of working through a limited company?
- You have the ability to control how you pay yourself through salary and dividends, which may be more tax-efficient (only if you're seen to work outside of IR35).
- You will have the ability to claim business expenses.
- This will create the need for specialist accountancy advice, which can be costly.
- You'll have more personal admin and book-keeping to calculate, and pay National Insurance and tax, taking responsibility for this as your company’s director.
- You will not be able to contribute to an NHS pension.
Our Top Tips
1. Speak to your agency, and/or the “client” (Trust or GP practice) early on if you plan to bill through a limited company, so they can give you advice and hopefully help you avoid any pitfalls.
2. Seek specialist accountancy advice if you plan to work through a limited company, as they can help you to understand if your contract would come under IR35 rules or not, and provide other valuable guidance.
3. Please also remember, this article is meant for basic information only and everyone’s individual circumstances will be different. Therefore, we strongly recommend seeking specialist financial advice to aid you in your decision making.
For more finance related articles, why not check out the following:
This article is part of a wider series of resources and guides that are designed to support you as a locum doctor, covering areas such as getting your first job, managing your finances, understanding your rights, and many more. Visit our Locum Doctor Hub for everything you need to know about locuming today.
Additionally, if you're considering an F3 year, you might also find it useful to look our comprehensive set of guides to ensure your F3 year is a success. These guides cover everything from initial planning, options for moving abroad, help with finding work, and tips for making the most of the experience. Click here to visit our F3 Resource Hub to explore the full list of guides and articles.