Locum doctor: sole trader or limited company (and why the NHS pension often decides it)

# Locum doctor: sole trader or limited company (and why the NHS pension often decides it)

Every locum reaches the same fork in the road: stay as a sole trader, or set up a limited company?

Online forums will give you confident answers in both directions. The useful answer is narrower: run the tax numbers, then weight the NHS pension. For many doctors, the pension point outweighs a modest corporation-tax saving.

This guide is a decision framework you can bookmark and revisit when your diary, income mix, or IR35 position changes.

Start with how you get paid

Before structure, clarify the work:

• NHS locum / bank / agency shifts that can be pensionable for individuals
• Private clinics or medicolegal work
• Mixed weeks where both sit side by side

Your paperwork trail matters. Invoices, agency terms, IR35 status (if relevant), and whether the engager will pay a personal sole trader or a company all constrain the choice.

If an engager will only contract with a limited company, or only with an individual, that practical constraint may decide the structure before tax does.

Option A: sole trader (self-employed)

How it feels day to day

• You invoice in your own name (or via an agency that treats you as self-employed).
• Profits are taxed as income; Class 2/4 National Insurance rules apply as relevant.
• Bookkeeping can stay relatively simple if your affairs are clean.

Strengths

• Straightforward for many pure NHS locum patterns.
• Easier route into NHS pensionable locum arrangements where the scheme rules allow (typically individual / partner routes, not company dividends).
• Lower admin than a company if you have one income stream and tidy records.

Watch-outs

• Higher marginal tax once profits rise.
• Personal liability sits with you.
• Weak expense discipline creates Self Assessment risk.

Option B: limited company

How it feels day to day

• The company contracts and invoices.
• You usually take a mix of salary and dividends.
• You need company accounts, Corporation Tax, confirmation statement, and cleaner record-keeping.

Strengths

• Can be tax-efficient for some private / outside-IR35 work, depending on profit level and extraction plans.
• Limited liability (still not a shield for negligence or regulatory duties).
• Useful if you are building a broader private practice brand.

Watch-outs

• Company income is generally not NHS-pensionable. This is the dealbreaker for many locums.
• Dividend tax rates have moved, old “salary + dividend” rules of thumb go stale quickly.
• Extra compliance cost can erase small tax wins.
• IR35 still matters: if the engagement is inside IR35, the company route may not deliver the saving you modelled.

The NHS pension point: in plain English

The NHS Pension Scheme is valuable. For eligible locum work taken as an individual, you may be able to pension that income under the scheme’s locum processes. Route the same work through a limited company and, in most cases, that income stops being NHS-pensionable.

So the comparison is never “corporation tax versus income tax” alone. It is:

Tax difference ± admin cost ± value of pension accrual forgone

Doctors often under-estimate the third item because it does not appear on a monthly payslip.

A simple way to think about it

Ask yourself:

1. How much of my locum income could be NHS-pensionable if I stay outside a company?
2. How many years am I likely to keep this pattern?
3. Is my private/non-pensionable work large enough that a company still wins overall?

If most of your income is potentially pensionable NHS locum work, sole trader (or partnership routes where relevant) often wins on total reward, even when a spreadsheet shows a small company tax edge.

If most of your income is private and genuinely outside IR35, a company can still be rational, provided you budget for accounts, payroll, and dividend planning.

Annual allowance: do not ignore it either

Separate from structure, high earners need to watch the pension annual allowance (standard £60,000 in recent tax years, with tapering for higher adjusted incomes). Extra pensionable locum sessions can increase pension growth and, in some cases, create an unexpected tax charge.

Structure decisions and annual allowance planning interact. Reducing pensionable pay via a company can ease taper pressure and cost you accrual. That trade-off needs numbers, not slogans.

A five-step decision checklist

1. Split last 12 months of income into NHS-pensionable locum versus private/other.
2. Confirm engager constraints (personal versus company; IR35 status letters if any).
3. Model both structures at your real profit level, include accountant/payroll fees.
4. Put a value on NHS pension accrual you would lose in a company (even a conservative estimate).
5. Decide extraction needs: if you need most profits as cash this year, company benefits shrink.

Re-run the checklist when:

• private work grows past ~30–40% of income
• you take a long NHS block with heavy pensionable pay
• dividend or Corporation Tax rates change
• you approach annual allowance taper territory

Record-keeping that prevents pain later

Whatever you choose, bookmark these habits:

• Separate business bank activity from personal spending.
• Keep mileage, course fees, indemnity, and equipment evidence as you go.
• Diary quarterly tax/NIC or Corporation Tax payments, surprises create forced bad decisions.
• Keep IR35 contract packs and status determinations with the invoices they relate to.

Worked decision sketches (illustrative)

These are patterns, not personal advice.

Sketch 1: mostly NHS locum, rising sessions

You do 6–8 pensionable locum sessions a week and a little private work. A company might show a tax saving on paper, but losing NHS pension accrual on those sessions is usually the larger economic story. Sole trader (with tidy records) is often the rational default until private work becomes substantial.

Sketch 2: mixed: NHS + growing private clinic

Private work is approaching a third of income and is genuinely outside IR35 / contracted with clinics that will pay a company. Some doctors run hybrid arrangements carefully (personal NHS locum where pensionable; company for private). Hybrid only works with clean bank lines, clear contracts, and advice, messy hybrids create the worst of both worlds.

Sketch 3: private-heavy, outside IR35

Almost all income is private medicolegal or clinic work, NHS pension accrual on that work was never available, and you can leave some profit in the company. Here a limited company can win, after fees, dividend tax, and your cash needs are modelled.

Questions to bring to an adviser (copy/paste)

• What share of my income is potentially NHS-pensionable?
• What is the estimated value of one year of accrual I would give up in a company?
• What does my take-home look like under both structures after professional fees?
• How close am I to annual allowance taper?
• If I incorporate later, what are the exit/entry frictions?

Record-keeping that prevents pain later

Whatever you choose, bookmark these habits:

• Separate business bank activity from personal spending.
• Keep mileage, course fees, indemnity, and equipment evidence as you go.
• Diary quarterly tax/NIC or Corporation Tax payments, surprises create forced bad decisions.
• Keep IR35 contract packs and status determinations with the invoices they relate to.
• Save pension statements and any annual allowance alerts in the same year folder as your accounts.

If you switch structure mid-year, close the old period cleanly: final invoices, stock of work-in-progress notes, and a short written timeline of “last date as sole trader / first date as company”. You, and your accountant, will be grateful later.

If you need help choosing, we are happy to run a structure review with pension-aware modelling. Bring last year’s income split, a sample contract, and your plans for the next two years, then get in touch and we can work through the decision together.

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General information for UK medical professionals. Tax, pension, and IR35 rules change and depend on your facts. Confirm current rates and scheme rules before you act.