Locum Dentist Ltd Company vs Self-Employed: Which Tax Structure Works Best?

Should You Run Your Locum Work Through a Limited Company?

Many locum dentists ask whether to operate through a limited company (often called a personal service company, or PSC) or to stay self-employed as a sole trader. The honest answer is that the structure follows the facts: your IR35 status on each engagement, your profit level, whether you want to keep accruing NHS pension, and how much admin you are willing to carry.

This guide leads with the 2026/27 position, because two recent changes matter. From 6 April 2026 the dividend ordinary and upper rates rose, and the employer National Insurance regime tightened from 6 April 2025. Both narrow the case for incorporation at typical locum profit levels. We walk IR35 first (it is the threshold question), then the extraction maths with a corrected worked example, then admin and the pension point.

Every locum dentist's situation is different and the figures below are for illustration. Take specific advice from a dental-specialist accountant before changing your structure.

IR35 Comes First: The Threshold Question

Before any tax comparison, settle your IR35 position, because it can remove the company's advantage entirely. Since 6 April 2021, where the engaging client is medium or large (most NHS practices and dental groups are), the client, not your PSC, determines your IR35 status under Chapter 10, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The client must issue a Status Determination Statement (SDS) with reasons, taking reasonable care.

If the client decides your engagement is inside IR35, the fee-payer deducts PAYE and National Insurance from the fees before paying your company. The money reaches the company net of tax, so the salary-and-dividend extraction that makes a PSC attractive is simply not available on that income. You end up taxed broadly like an employee, but with company admin on top and no employment rights.

If the engagement is outside IR35, the fee-payer pays gross and your company extracts profit in the normal way. A locum working across several practices may genuinely hold a mix: some engagements inside, some outside.

You are more likely to be outside IR35 where you:

• Work for several practices rather than one
• Have a genuine right of substitution
• Are not under the practice's day-to-day control over how and when you work
• Bear real financial risk (you invoice for work done and carry your own indemnity and CPD)

If you work mainly for one practice that controls your schedule and methods, HMRC may argue you are an employee in all but name. A model associate-style agreement is supportive evidence, not a shield: HMRC and tribunals look at the actual working practice, not the paperwork. You can challenge an SDS through the 45-day client-led disagreement process. For the detail on NHS engagements, see IR35 for locum dentists on NHS engagements. Where a practice insists on an umbrella rather than your own company, our note on umbrella companies for locum dentists covers the tax effect.

How Locum Dentists Are Taxed: Sole Trader vs Limited Company

As a self-employed locum (sole trader), you pay income tax and Class 4 National Insurance on your profits. You report fees minus allowable expenses on the self-employment pages of your Self Assessment. One layer of tax, one return.

As a locum through a limited company, the company pays corporation tax on its profits first. You then extract money as salary, dividends, or a mix, which is taxed again in your hands. Two layers: corporation tax on company profit, then income tax on salary and dividend tax on dividends. Done well this can be efficient at higher profits, but on the 2026/27 figures the gap at typical locum levels has closed.

Sole Trader: The Rates That Apply

Income tax bands and self-employed National Insurance are unchanged for 2026/27 from 2025/26:

• Personal allowance £12,570, tapered by £1 for every £2 of income above £100,000
• Basic rate 20% on income from £12,571 to £50,270
• Higher rate 40% from £50,271 to £125,140; additional rate 45% above £125,140
• Class 4 National Insurance 6% on profits from £12,570 to £50,270, then 2% above
• Class 2 National Insurance was abolished from 6 April 2024; profits above the small-profits threshold still bank a state-pension year

Limited Company: The Rates That Apply

For a company, corporation tax is banded and not flat:

• 19% small-profits rate on profits up to £50,000
• 25% main rate on profits above £250,000
• Between £50,000 and £250,000, marginal relief applies, giving an effective rate of about 26.5% on the slice in that band (the marginal relief fraction is 3/200). A company on £75,000 of profit does not pay a flat 19%

You then extract the after-tax profit. Salary is deductible for the company but draws income tax and National Insurance personally and, above the employer threshold, employer National Insurance for the company. Dividends are paid from post-tax profit and carry dividend tax:

• From 6 April 2026 (2026/27, Finance Act 2026 s.4): ordinary 10.75%, upper 35.75%, additional 39.35%, dividend allowance £500
• 2025/26 (for context): ordinary 8.75%, upper 33.75%, additional 39.35%, dividend allowance £500

On the employer side, the company pays employer (secondary) National Insurance at 15% on salary above the secondary threshold, which fell to £5,000 a year from 6 April 2025. A company whose only employee is a single director cannot claim the Employment Allowance, which is why one-director locum companies often set the director's salary at the £5,000 secondary threshold: it incurs no employer National Insurance and is still deductible for corporation tax. Setting salary at or above the Lower Earnings Limit (£6,708 for 2026/27) is what banks a qualifying year for the state pension, so some directors run a slightly higher salary to protect that, accepting a small employer National Insurance cost. The detail of the salary-versus-dividend mix is in paying yourself from a locum limited company.

Worked Example: £80,000 of Net Profit at 2026/27 Rates

Take a locum with £80,000 of profit after expenses and compare the two routes on the same income, using current 2026/27 rates. The company example assumes a £5,000 director's salary (the secondary threshold, so no employer National Insurance) with the rest extracted as dividends.

Route A: Sole trader, £80,000 net profit

• Personal allowance £12,570 (tax-free)
• Basic rate: £37,700 at 20% = £7,540
• Higher rate: £29,730 at 40% = £11,892
• Income tax total: £19,432
• Class 4 National Insurance: £37,700 at 6% = £2,262, plus £29,730 at 2% = £595. Total £2,857
• Total tax and National Insurance: £22,289. Net take-home about £57,711

Route B: Limited company, £80,000 profit, £5,000 salary plus dividends

• Salary £5,000: no income tax or employee National Insurance (within the personal allowance and at the secondary threshold), and no employer National Insurance
• Profit chargeable to corporation tax: £80,000 less the £5,000 deductible salary = £75,000
• Corporation tax with marginal relief: (£75,000 at 25% = £18,750), less marginal relief of (£250,000 minus £75,000) at 3/200 = £2,625, giving £16,125 (an effective 21.5% on £75,000, not 19%)
• Profit after corporation tax, available as dividends: £75,000 less £16,125 = £58,875
• Personal allowance left after the £5,000 salary: £7,570 of dividends covered tax-free
• Dividend allowance: next £500 at 0%
• Ordinary-rate dividends: £37,200 at 10.75% = £3,999
• Upper-rate dividends: the remaining £13,605 at 35.75% = £4,864
• Dividend tax total: £8,863
• Total tax (corporation tax £16,125 plus dividend tax £8,863): £24,988. Net take-home about £55,012

Side by side at 2026/27 rates, on £80,000 of profit:

Item	Sole trader	Limited company (£5,000 salary plus dividends)
Income tax	£19,432	£0 (salary within allowance)
National Insurance	£2,857 (Class 4)	£0 (employer and employee)
Corporation tax (marginal relief)	n/a	£16,125
Dividend tax	n/a	£8,863
Total tax and National Insurance	£22,289	£24,988
Net take-home	about £57,711	about £55,012

On the 2026/27 figures the sole trader is ahead by roughly £2,700 at this profit level, before you add the company's accountancy and payroll costs. That is a reversal of the old position, where the two routes were close to neutral at £80,000. Two things drove the change: the dividend rates rose from 6 April 2026 (ordinary 8.75% to 10.75%, upper 33.75% to 35.75%), and a company on £75,000 of profit pays corporation tax with marginal relief at about 21.5%, not a flat 19%. Comparisons that assume 19% across the board, or that still use the old dividend rates, overstate the company's case.

NHS Pension: Often the Deciding Point

For many locums this outweighs the tax line. A sole trader locum pensions their NHS-derived income on the practitioner basis and accrues in the 2015 CARE scheme, at 1/54th of pensionable earnings each year, revalued while active at CPI plus 1.5%. It is a guaranteed, index-linked benefit that is difficult to recreate with private investment.

The catch with incorporation is that dividends are not pensionable. An incorporated associate-style locum is treated as an officer: only the PAYE salary counts as pensionable pay. Pay yourself a £5,000 salary plus dividends and your pensionable pay is £5,000, so the dividend slice builds no NHS pension. Over a ten to fifteen year run to retirement, that lost accrual can dwarf any annual tax difference. (Whether an incorporated contract-holding principal can still pension NHS-derived profit through the practitioner mechanism is genuinely contested and case-specific; confirm your own position with NHSBSA rather than assuming it either way.) If keeping NHS pension accrual matters to you, the sole trader route usually wins on this point alone.

Administration and Compliance

A company is more work than a sole trade. You must:

• File annual accounts with Companies House
• File a corporation tax return with HMRC
• Run a payroll and submit Real Time Information each pay period, even as the only employee
• Maintain statutory registers
• Still file a personal Self Assessment for your salary and dividends

The sole trader route is one Self Assessment return a year, with no company accounts, no payroll, and no corporation tax return. Note also that Making Tax Digital for Income Tax mandates digital records and quarterly updates for sole traders with qualifying income above £50,000 from 6 April 2026, so most full-time locums are in scope; companies are not (Making Tax Digital applies to income tax, not corporation tax). Set the company's running costs against any tax difference, which, on the example above, currently runs the wrong way for the company at £80,000.

Beware the Overdrawn Director's Loan

One company-only trap catches locums who draw money through the year and tidy it up at the year-end. A dental company is a close company, so an overdrawn director's loan account triggers a section 455 charge: the company pays corporation tax at the dividend upper rate on the loan still outstanding nine months and one day after the period-end. That rate is 33.75% on loans made in 2025/26 and 35.75% on loans made on or after 6 April 2026. The charge is repayable once the loan is cleared, but the refund is itself deferred, so it is a real cash-flow cost. A sole trader simply cannot make this mistake: the business money is already your money.

Profit Extraction, Timing and Higher Earners

The company's genuine advantage is control over timing. If you have a high-income year, you can leave profit in the company taxed at corporation tax now and extract it in a lower-income year, smoothing your personal tax. At £120,000, for instance, a sole trader loses the personal allowance (tapered above £100,000) and pays higher-rate tax across most of the income; a company lets you draw, say, £80,000 personally and retain the rest for a leaner year or for reinvestment. Retained profit can also fund buying into a practice or partnership later.

This only helps if lower-income years are genuinely coming, or if you have a reinvestment plan. As a pure annual tax exercise at typical locum profits, the 2026/27 dividend rates and the marginal-relief corporation tax mean incorporation no longer produces a reliable saving. For a side-by-side on the employment status itself rather than the structure, see locum versus associate tax treatment.

When a Limited Company Can Still Make Sense

• Your profit is well above the typical level, so retaining earnings and timing extraction is worth real money
• You are clearly outside IR35 across your engagements
• You do not need to keep accruing NHS pension, or you have planned alternatives
• You want to retain profit for reinvestment, such as buying into a practice
• You plan to build retained profit and extract it on a future winding-up, where a capital distribution may be taxed at capital gains rates rather than as a dividend

When Sole Trader Is the Better Choice

• Your profit is at a typical locum level, where the example above shows the sole trader ahead
• You want to keep accruing NHS pension on the practitioner basis
• You work mainly for one practice and could be caught by IR35
• You prefer one annual return and lower running costs
• You have no need to retain profit in a company

Switching Structure

If you move from sole trader to company, you register the company at Companies House, register it for corporation tax, open a business bank account, transfer any assets, and tell HMRC the self-employment has ceased. Transferring a business into a company can trigger capital gains tax, though incorporation relief under TCGA 1992 s.162 can defer the gain where you transfer the whole business as a going concern wholly or partly for shares. Moving back the other way means closing the company and extracting any retained profit, which carries its own dividend or capital gains tax. Either direction repays careful planning with your accountant.

VAT for Locum Dentists

Dental care provided by a registrant is exempt from VAT under VATA 1994 Schedule 9 Group 7, whether you trade as a sole trader or a company, so you do not charge VAT on locum fees for dental treatment. Purely cosmetic work with no therapeutic purpose (for example tooth whitening, or facial aesthetics for cosmetic reasons) can be standard-rated, and if your taxable (non-exempt) turnover exceeds £90,000 you must register for VAT. Exempt dental income does not count towards that threshold. This is a borderline area HMRC scrutinises, so take advice if it applies to you.

Summary

For most locum dentists at typical profit levels, the sole trader structure is the better fit on the 2026/27 figures: it keeps NHS pension accrual on the practitioner basis, costs less to run, and carries no IR35 or director's-loan risk. The worked example shows the company route now costing more at £80,000 once you apply the higher 2026/27 dividend rates and corporation tax with marginal relief, before any company running costs.

A company still earns its place for clearly-outside-IR35 locums at much higher profits who value retaining and timing earnings and do not need NHS pension accrual. The right answer depends on your numbers and your work pattern, so settle your IR35 position first, then run the maths for your own income before speaking to a dental-specialist accountant who understands locum tax, IR35 and the NHS Pension Scheme.