How are associate dentists taxed?

Most associates are self-employed. They are paid under an associate agreement, usually a share of the fees they generate, and pay income tax and National Insurance through self assessment, with payments on account. They can claim the costs of earning their income, such as professional registration and indemnity, subject to the usual rules.

When should a dentist consider a limited company?

When profits are high enough that the tax and National Insurance difference outweighs the extra administration and cost, and when you want the flexibility of leaving profit in the company. The answer depends on your income, pension plans, borrowing and future plans for a practice, so it is worth modelling both routes rather than relying on a rule of thumb.

Is dental treatment subject to VAT?

Most dental treatment provided by a registered dentist is exempt from VAT, but some cosmetic work and certain supplies can be taxable. A practice with a mix of exempt and taxable income may need to handle partial exemption, which is worth checking before it becomes a surprise.

What should I check before buying a dental practice?

The split between NHS and private income, the terms and length of any NHS contract, the associates' agreements and whether they will stay, the condition and ownership of equipment, the lease, staff costs, and how the price is allocated and funded. Due diligence should also cover the tax position of the business you are buying.

What records should an associate dentist keep?

Your fee statements and remittances, your associate agreement, receipts for professional costs and equipment, mileage or travel records if you work at more than one practice, and your pension and tax statements. Keeping them by month makes the year end far quicker.

Accounting for Dentists: A Guide for UK Practices

A dentist's finances do not look like most professionals'. Income comes from the NHS and from private patients, often at the same time. Some dentists work as associates in someone else's practice, some own the practice outright, and many move between the two. Equipment is expensive, laboratory fees are significant, and buying or selling a practice is likely to be the largest financial decision of a career.

This guide explains how accounting and tax work for associates, principals and practice owners, and what to look for in an accountant who understands dentistry.

Associate, principal or owner

Most of the tax and accounting questions follow from which of these you are.

Associates provide treatment in a practice owned by someone else. They are normally self-employed, paid under an associate agreement that sets out how their fees are shared with the practice, and responsible for their own tax.

Principals hold the NHS contract or own the private patient base, and often employ associates, nurses, hygienists and reception staff. They run a business as well as treat patients.

Practice owners are principals who also own the premises or the company that holds the practice. Their position has the added dimensions of property, borrowing and, eventually, an exit.

Many dentists are two of these at once, for example a principal who also works as an associate elsewhere, so the accounts need to treat each source of income correctly.

How associates are taxed

An associate who is self-employed completes a self assessment tax return and pays income tax and National Insurance on their profit. The practice pays them gross, so nothing has been deducted before the money reaches them, and tax is paid through payments on account during the year and a balancing payment after it.

The things worth getting right:

Provision for tax. Set money aside from each payment so the bill, which arrives in large instalments, is never a surprise.
Allowable costs. Professional registration and indemnity, subscriptions, courses that maintain existing skills, instruments, loupes and other equipment, and travel between practices are typical examples. The rule is that a cost must be wholly and exclusively for the work.
Laboratory fees. Many associate agreements share these with the associate, so check what yours says and make sure the right amounts are recorded.
Records. Fee statements from the practice should match your own records. Gaps and differences are common and should be resolved as they arise.
Pension. Contributions and the tax treatment of NHS pension membership need to be accounted for correctly at year end, including any pension certificates and statements.

Sole trader or limited company

Many dentists ask whether they should incorporate. There is no universal answer. It depends on:

how much profit you make, and how much of it you need to draw to live on;
whether you want to leave profit in the company, or draw it all;
your pension plans and how you want to fund them;
how you want to borrow, for a home, a practice or equipment;
whether you intend to buy a practice, take on associates or sell one day;
and the extra administration, cost and formality of running a company.

For some dentists, particularly higher earners who do not need to draw all of their profit, a company is helpful. For others it adds cost and complexity for little gain. The right approach is to model both for your own figures and revisit the decision as your circumstances change. If you do incorporate, how the move is made matters, so the change should be planned rather than rushed.

NHS and private income

A dentist working across both has two sets of rules and often two sets of paperwork. NHS income is governed by contract terms and is typically paid on activity delivered, with clawback and adjustment at the end of the contract year. Private income is invoiced to patients, with its own payment methods and patient plans.

Your accounts should keep the two streams separate so you can see which is profitable, and so tax, VAT and pension treatment are right for each. For principals this separation is also what lets you answer a lender's or a buyer's questions quickly.

Running a practice

If you own or run a practice, the accounts do more than satisfy the tax authorities. They are the way you know how the business is doing.

Management accounts. Monthly figures showing income by stream, laboratory costs, staff costs and profit, with a note of what has changed.
Payroll. Employed staff, pension auto-enrolment and any associates who are employees rather than self-employed.
VAT. Most dental treatment is exempt, but a mix of exempt and taxable income can restrict the VAT you can reclaim on costs, so it is important to know where you stand.
Capital allowances. Surgery equipment, X-ray and digital systems and some of the fit-out can qualify for tax relief, and the timing of purchases can matter.
Equipment finance. Hire purchase, leasing and loans each have different accounting and tax treatment.
Cash flow. Month-end timing of NHS payments, laboratory bills and tax can leave a practice short at awkward moments, and a forecast shows them in advance.

Buying or selling a practice

Buying a practice is the largest transaction most dentists make, and selling one is usually the biggest tax event of their working life. In both cases the accountant's work starts well before the contract.

When buying, expect to review:

income by stream, and the history of each, over several years;
the NHS contract, its value and its remaining term;
the associates, their agreements and the risk that they leave;
the lease, equipment ownership and any finance;
staff costs and obligations;
and how the price will be funded and how it will be treated for tax.

When selling, preparation is worth the effort: clean accounts, a clear story about income and growth, resolved issues with the lease and contracts, and an understanding of the tax on the sale, including any reliefs available. Structure, such as whether you sell the business or the company's shares, changes both the price and the tax, so it should be decided early.

Choosing an accountant for a dental practice

Ask a prospective accountant:

How many dentists and dental practices do you act for, and are they associates, principals or both?
Do you understand NHS contracts, pension certificates and associate agreements?
Will you model sole trader and limited company options for my own figures?
How do you handle partial exemption for VAT?
Can you help with a practice purchase, from due diligence to funding?
What accounting software do you use, and will I see my figures monthly?
Who is my contact, and how quickly do you reply?
Which professional body regulates you?

Working with Tributom Advisory

Tributom Advisory is an ICAEW-regulated practice. For dentists and dental practices we provide accounting, tax and cloud accounting for associates, principals and practice owners, and support with buying or selling a practice. We can take over from your current accountant mid-year and manage the handover directly.

Accounting for dentists: associates, principals and practice owners