Many hospital consultants with a Private Practice have accepted and value the business benefits that are associated with the limited company structure. As an accountant working with the medical profession, there is never a week that goes by without the talk of salaries, dividends, goodwill and low emission motor vehicles. Whist all of these terms are relevant to medics working through companies, real success stems from the implementation of an easy-to-manage directors’ remuneration policy, often referred to as the profit extraction strategy.
As a firm, we have made it our priority to ensure that our clients employ a sensible profit extraction strategy. I.e. an arrangement where the doctor(s) take money from their company tax efficiently to fund their lifestyle, usually using a combination of salaries and dividends. Indeed we believe that the profit extraction process is singularly the most important matter to consider when providing private medical services via a limited company.
We understand that one size does not fit all and therefore the strategy I am about to outline should not be implemented without consultation with a suitably qualified accountant. Some consultants prefer to retain profits within the company for future projects or as part of a longer term exit strategy. However, let us look at a typical scenario:
- Husband and wife own and direct the limited company
- Husband is a financial controller (non-medical), wife is a colorectal surgeon (the fee earner)
- The couple require personal cashflow from the company of £60k per annum after all taxes
- Their financial liabilities (mortgage, school fees, holidays) mean that they require frequent access to company cash
- The directors do not have the time to consult with their accountant each and every time that they require cash from their company
In order to create a situation which meets with the needs of the directors, the accountant may consider this approach:
- Prepare the company accounts in order to identify the profit available for distribution,
- Perhaps schedule a meeting with the client to review the results (not always necessary however may be appropriate in Year 1 at least),
- Declare one dividend to fund one year’s worth of personal cashflow. With reference to the example above, let us say that this dividend is £75k (£60k for free spend and £15k for the associated dividend tax),
- The company sets up 12 standing order payments for £5k to be paid to the family (cumulative) on the first day of each calendar month giving them their £60k cash per annum,
- The remainder of the dividend £15k (£75k less £60k) is kept in the company enabling the company to pay the directors’ personal tax when it falls due,
- The process is repeated each year thereon with reference to business profits and personal cashflow requirements.
This structure has been proven to work very well for some clients of Sharpe Medical Accounting Ltd. Interested parties should contact matt@sharpemedical.co.uk or 07587 878 283