Locums are classed as self-employed and are responsible for paying their own tax and national insurance (NI) contributions. As well as that, they're responsible for keeping their accounts in order and up-to-date.
For those new to locuming, setting up as a Sole Trader is the most popular option. Setting yourself up as a Limited Company tends to work best for those who have been locuming for an extended period.
Working as a sole trader
Sole traders keep a record of their expenses and income, and submit a self-assessment tax return to HMRC each year.
If you earn over £1,000 via self-employed work, you will need to register as a Sole Trader.
As a sole trader, you're responsible for paying tax and NI contributions and for keeping your accounts in order/up-to-date.
Once you earn over £1,000, you must notify the HMRC within three months of starting self-employed work or you risk being charged a penalty. Visit the HMRC site if you need more information.
Tax payments are usually due by midnight on 31 January and 31 July. You don't need to register for VAT unless your turnover is more than £85,000 a year.
Setting up a limited company
If you decide to set up a limited company as a director or shareholder, you restrict financial liability.
Income tax is deducted from directors' salaries through the PAYE scheme and paid at intervals.
Directors are not required to complete an annual tax return if you are taxed under PAYE and receive no additional untaxed income.
Tax is payable on any dividends received in excess of £2,000 a year, and corporation tax is charged at 19% of net profits.
As well as filing annual accounts, a limited company must also supply Companies House with a confirmation statement containing details of the registered office, the director, and the shareholders.
NI contributions compared
Sole traders and limited companies pay different types and amounts of NI contributions.
Sole traders pay class 2 NI contributions of £3.15 a week for earning profits of £6,725 or more a year and class 4 contributions on profits in excess of £11,909 or more a year, that are charged at 10.25% on profits between £11,909 and £50,270 and 3.25% on profits over £50,270.
However, within a limited company, NI is payable on directors' salaries and bonuses – and usually amounts to considerably more than sole traders' pay.