A significant number of our clients are psychologists running their own practice, so I thought it would be useful to write a guide highlighting issues specific to them.
Please let us know if there is anything below that I have not covered, and I will look to update this post.
There is a lot of information below – please remember we are here to help you through all of the regulatory requirements and are happy to answer any questions or clarify anything further as required.
Should I register as self-employed or work through a limited company?
The answer to this will depend on your situation. Many of our clients also work for the NHS or a private company. For these clients, it is likely to be less tax-efficient for them to operate through a limited company.
If your private practice is your only source of income, then it is most likely that operating through a limited company will be favourable for you. This is due to tax savings that you can make by taking a combination of a salary through PAYE and dividends from the company.
The decision you make when you first start your practice is not set in stone, and you can change between being self-employed to working through a company, or vice versa, at a later date.
If you need any specific guidance on which would be best for you, then we will be happy to advise you on this.
There is more general guidance on limited companies here.
What deadlines are there?
Regardless of which approach you take you will need to register with HMRC. The reason you need to register if you are operating through a limited company is that you will need to declare on a tax return any dividends that you have taken from your company. If you are self-employed, you will need to declare your income through self-employment.
HMRC’s tax year runs from 6th April one year to 5th April the following year. You need to register with them by 5th October following the end of your first tax year. For example, if you started trading in January 2022, the tax year would end 5th April 2022, and you would need to be registered by 5th October 2022. You can register here.
Each tax return is due by the 31st of January following the end of the tax year, so using the above example your first tax return would be due by 31st January 2023.
Payment of your tax bill is due on the same date, so if you’re able to get everything to us significantly before the deadline, you obviously have a lot more time to ensure that you have the money available to pay your tax bill. At the moment HMRC are operating a time to pay scheme, where you may be able to spread your tax bill over the course of the year.
Depending on the size of your tax bill, you may also have to make payments on account. This would mean you pay your tax bill in advance with a higher payment in January and then another payment in July. In the above example, this would mean you would pay around half of your tax bill again on 31st January 2023 and on 31st July 2023. You can make these payments earlier if you wish.
If you are operating through a limited company, you will have additional deadlines. Your company will likely have a year end that does not coincide with HMRC’s tax year – for example if you set up your company on 1st January 2022, your year end will likely be 31st December 2022. You will have 9 months from that point to file your accounts with Companies House and your Corporation Tax return with HMRC. In this example, you would have a deadline at the end of September.
How do I pay my tax bill?
To make the payment to HMRC, the best way is to go here for personal tax bills and here for Corporation Tax. You can then follow it through for several different ways to pay. For Corporation Tax, you may need a reference number which we can provide to you.
What happens when you take me on as a client?
Once we have had an initial discussion and agreed on a fee, we will produce a contract for you to sign electronically.
We also need to complete due diligence to comply with Anti Money Laundering regulations which would require us to see at least two forms of ID.
There are HMRC forms called 64-8 that we can fill in and submit to HMRC to request authorisation to act on your behalf. For this we would need several bits of information such as your Unique Taxpayer Reference (UTR) that you will get when you register with HMRC and your National Insurance number.
When will you be in touch with me?
This will depend on your circumstances. If you are only self-employed, we will contact you shortly after the end of the tax year. If you are self-employed and employed, it will be a couple of months later, as to complete your return we would also need your P60 from your employer. If you are working through a limited company, it will be in the month following the end of your accounting year. At that point we will be asking for your records so that we can produce your accounts.
How should I keep my records?
There are several record keeping systems that are specific to psychologists– MidexPro and WriteUpp are two that I know of but I’m sure there are more. These assist you in running your practice on a day-to-day basis. If you are using one of these, we will either need access to the system or – much better for client confidentiality – a download from the system with anonymised data but including all the financial information. Ideally if you are using one of these then you will be able to log your expenses as you go such that they also form part of this download.
If you are not using one of these, then I recommend looking at some accounting software. The blog I wrote on this has more information.
At this stage, using software is not compulsory and you can use a spreadsheet. However, I strongly recommend software because HMRC are looking to make it compulsory (although the implementation date keeps getting pushed further back) but primarily because I know how valuable your time is and I believe that software can provide significant time savings for minimal cost.
What information do you need?
As well as all of your records, there are some other pieces of information that will help us to complete your tax return. If you have also been in employment in the financial year, we will need either your P60 or P45 as appropriate, and your P11D if applicable.
What costs can I claim?
The general rule is that any expense directly related to your work should be fully claimable. With any expenses that are partly work and partly personal, then you should be able to claim a portion. Things that fall into the latter category could be your mobile phone or your broadband cost.
Many psychologists are working from home a lot more since the pandemic hit, and you can claim for a portion of your costs. There is a standard allowance that HMRC offer based on the number of hours you work from each month.
I have previously been advising clients to use this as it is the simpler way of calculating how much you can deduct and usually gives a roughly similar deduction to the more complex method of adding up all your actual spend, apportioning it by room and then by the amount of time you use that room for work. However, with rising fuel bills, it may be that more of our clients go down the more complex route over the next few years – although it is possible HMRC might give a more generous allowance to compensate.
I’ll list a number of items that psychologists tend to claim for below. This isn’t an exhaustive list, so if something doesn’t appear on it that you think you should be allowed to claim, feel free to ask our opinion on it.
- Equipment expenditure (laptops, testing etc as well as anything required for your sessions)
- Bad debts (if a client doesn’t pay and you write off their invoice)
- Associate fees
- Supervision fees
- Professional memberships or registrations
- DBS checks
- ICO fee
- Union fees
- Training, CPD and research
- Advertising and website expenses
- Insurance
- Accountancy fees
- Secretarial/admin assistance
- Room hire or office rent
- PPE (primarily this has been facemasks recently)
- Software
- Public transport costs
- Mileage (which is more favourable than petrol), parking and tolls
- Accommodation
- Printing, postage and stationery
- Mobile phone
- Working from home
- Broadband
- Bank charges
What tax will I pay?
This depends on whether you go down the self-employed or limited company route. For a self-employed individual, you will pay income tax (which is 20%, 40% or 45% depending on your level of income). If your profits through self-employment are over £6,515 then you pay Class 2 National Insurance of £3.05 for every week you are self-employed. If they are over £9,569 then you also pay Class 4 National Insurance which is 9% of profits above that until £50,270 and then 2% on profits thereafter.
If you work through a limited company, instead of Income Tax you are more likely to pay Dividend Tax which is at a lower rate than Income Tax (8.75%, 33.75% and 39.35% from April 2022).
Do I need to be VAT registered?
Practitioner psychologists, along with other healthcare services, are exempt from VAT. This means that you do not need to register for VAT, even if the total of your invoices exceeds the current VAT threshold of £85,000.
There may be some services you offer that are not exempt from VAT and if the total of these services exceeds the VAT threshold in any rolling 12-month period, then you do need to register for VAT. Section 4.3 of the government guidance here outlines a bit more about it, but in general anything relating to medical care will be exempt.
It is possible to register for VAT voluntarily. The main reason for doing this would be to reclaim some of the VAT on your costs. However, you can only claim back the VAT on items that relate specifically to the non-exempt sales you make and for most practicing psychologists, this is likely to have a minimal impact.
Anything else I should know?
Many psychologists earn over £50,000 per year which has a few effects. Firstly, it pushes you into the higher tax bracket where you would pay income tax at 40p in every pound above that threshold rather than 20p in every pound below it.
There are three other key effects:
- If you make donations to charity through gift aid, you can declare these and reduce your tax bill. This is because donations to charity are tax-free. The charity will claim tax back on your behalf (which they retain) on the assumption you are in the 20% tax bracket. You can therefore effectively claim back the additional tax on your donation.
- If you claim child benefit, you may need to repay some or all of it back to HMRC depending on your total income.
- If you make payments to a pension other than through your employer, you can claim back the tax on these payments as well because payments into a pension scheme are also tax free.
