Incorporating a Dental Practice: Why “Tax Savings” Aren’t as Simple as They Sound
For dental partners, sole traders, and the advisers who support them
For dental partners, sole traders, and the advisers who support them, incorporation is often presented as a straightforward way to reduce tax. The logic seems simple: a limited company pays Corporation Tax, which is lower than personal income tax — so incorporating must save money.
In practice, that assumption is frequently wrong.
This article was prompted by a real client case. While preparing for a meeting with a dental partnership, we were asked to explore incorporation following a referral from a financial adviser who had suggested it as a tax‑saving strategy. As part of that process, we modelled the numbers properly — including goodwill, Capital Gains Tax, Corporation Tax, and how profits would actually be extracted after incorporation.
What became clear very quickly was this: the headline Corporation Tax rate tells only a small part of the story. For dental practices, the tax outcome of incorporation depends far more on structure, timing, and how goodwill is treated than on the company tax rate alone.
Dentistry is unusual. Many practices are long‑established, highly profitable, and built on personal reputation, NHS contracts, and patient goodwill. As a result, goodwill values are often substantial — frequently running into hundreds of thousands of pounds, or more. That goodwill does not disappear on incorporation. From HMRC’s perspective, it is treated as being sold to the new company at market value.
This is where most incorporation tax plans succeed or fail.
Incorporation does not remove tax. It changes when tax is paid, how it is paid, and at what rate. In some cases, it can reduce lifetime tax and improve cash‑flow flexibility. In others, it can trigger six‑figure Capital Gains Tax bills or lead to a higher overall tax burden once profits are extracted.
The only way to know whether incorporating a dental practice genuinely makes sense is to model the full picture — not just the headline rates.
Table of Contents
Why dentists search “incorporate dental practice tax”
Dentists and advisers often search phrases such as “incorporate dental practice tax”, “does incorporating a dental practice save tax”, or “dental goodwill CGT on incorporation”.
Those searches usually stem from the same assumption: that moving into a limited company automatically reduces tax because Corporation Tax is lower than income tax.
In dentistry, that assumption is often incomplete.
The short version: does incorporating a dental practice save tax?
Incorporating a dental practice doesn’t ‘save tax’ — it moves the tax bill. The outcome hinges on goodwill, CGT, and how profits are extracted — not the Corporation Tax rate on its own.
In many cases, the headline claim that “a limited company pays less tax” ignores:
- Capital Gains Tax (CGT) on goodwill
- How money is actually extracted personally
The only way to know whether incorporation saves tax is to model the full picture.
Why incorporation tax planning is different for dentists
Dentistry is unusual. Many practices are:
- Long‑established
- Highly profitable
- Built on personal reputation and NHS contracts
- Structured as partnerships or sole traders
As a result, goodwill values are often significant — and goodwill is where most of the tax complexity (and misunderstanding) sits when incorporating.
For many practices, goodwill can easily be valued at £500k–£1m+.
What happens to goodwill when a dental practice incorporates
When a dental partnership or sole trader incorporates, the goodwill does not disappear.
From HMRC’s perspective:
- The owners are selling their goodwill to the new company
- Because they control the company, this sale is treated at market value
This is the starting point for most incorporation tax issues.
Capital Gains Tax on dental goodwill
A crucial (and often misunderstood) point:
In many owner‑managed incorporations, BADR is usually not available on goodwill transferred to a company you control
That means:
- No discounted CGT rate
- The gain is taxed at the standard CGT rates
- For higher‑rate taxpayers, that is currently 24%
A £1m goodwill valuation can therefore trigger £240,000 of CGT upfront.
This isn’t a rare outcome — it’s what happens unless the structure is designed upfront.
Two ways to incorporate a dental practice — and why the tax outcome differs
Option A: Shares + CGT deferral known as incorporation relief
If goodwill is transferred in exchange for shares:
- Incorporation relief can apply
- CGT is deferred, not eliminated
- The gain crystallises later when shares are sold
Pros
- No CGT payable at incorporation
Cons
- Most value is later extracted as dividends
- Dividend tax plus Corporation Tax can push the effective tax rate very high
- Little flexibility over cash extraction
- All business assets must be transferred into the new company, including property and vehicles, which can trigger unintended and potentially costly tax consequences
Option B: Loan account + CGT now
If goodwill is sold for a director’s loan account:
- Incorporation relief is restricted
- CGT is payable upfront at up to 24%
- The loan represents post‑tax capital
Pros
- Loan principal can be withdrawn tax‑free
- Interest can be charged on the loan (Corporation Tax deductible)
- Much greater cash‑flow flexibility
- Shares have a higher ‘base’ cost value reducing CGT due when practice is sold
Cons
- CGT bill upfront
- Needs careful modelling to ensure affordability
Comparing the tax outcomes — shares vs loan account
Illustrative example only — actual outcomes depend on valuation, profit extraction plan, and personal tax position:
- £1,000,000 goodwill
- Higher‑rate taxpayers
- Corporation Tax ≈ 25%
- Before incorporation, partnership profits can be taxed at up to 47%, comprising 45% income tax and 2% Class 4 National Insurance.
Shares + deferral (dividend extraction later)
- Corporation Tax on profits to fund £1m dividends: ~£333,000
- Dividend tax at 35.75%: ~£357,500
Total tax: ~£690,500 (≈ 69%) 22% higher than the top tax rate paid in partnership
Loan + CGT now
- CGT upfront: £240,000
- Corporation Tax on profits to repay loan: ~£333,000
- Loan repayments: tax‑free
Total tax: ~£573,000 (≈ 57%) 10% higher than the top tax rate paid in partnership
Key takeaway: Incorporation does not remove tax — it changes when, how, and at what rate tax is paid.
Using director loan interest to manage tax after incorporation
When a loan exists for the goodwill, the company can:
- Pay interest on the loan
- Deduct that interest for Corporation Tax
- Tax the interest personally as income (with 20% tax deducted via CT61)
This allows:
- Income to be kept within basic‑rate bands
- NIC to be avoided
- Dividends to be deferred
Once the loan (and interest headroom) is exhausted, profit extraction naturally switches to dividends.
So… should you incorporate a dental practice for tax reasons?
Sometimes — but only if you understand and model the full tax picture.
Incorporation can:
- Reduce lifetime tax
- Improve cash‑flow flexibility
- Help manage pension allowance exposure
- Lock in profits to avoid paying higher tax rates
But it can also:
- Trigger CGT bills
- Increase complexity
- Deliver higher lifetime tax if done badly
- To avoid higher tax rates owners avoid extracting profits
Our view on dental practice incorporation
Incorporation is not a tax product — it is a structural business decision.
For dental practices, it must be assessed alongside:
- Goodwill value
- Profit levels
- Personal income needs
- Pension position
- Exit plans
Anyone presenting incorporation as a simple tax saving is only telling part of the story.
Frequently asked questions about incorporating a dental practice
Does incorporating a dental practice always save tax?
No. Incorporation changes how and when tax is paid, but it does not automatically reduce it.
Do you pay Capital Gains Tax when incorporating a dental practice?
Often, yes. Goodwill is treated as sold at market value unless incorporation “deferral” relief applies.
Does Business Asset Disposal Relief apply?
No — where goodwill is sold into a company the dentists control.
Can loan accounts be withdrawn tax‑free?
Yes. Loan principal represents post‑tax capital.
Do you pay SDLT / Stamp Duty on goodwill?
No, there is no SDLT or Stamp Duty paid on the sale of goodwill.
When do dividends come back into play?
Usually after the loan and interest headroom have been largely exhausted.
Call to action: get a dental incorporation tax review
If you are:
- A dentist considering incorporation and being advised that a company will “save tax”
- A financial adviser wanting a second opinion on dental goodwill and CGT
We’re happy to help you model the numbers properly.
Before you incorporate, make sure you understand the real tax outcome — not just the headline rate.
Get in touch for a tailored dental incorporation review.
This article is for general information only and does not constitute tax advice. Dental incorporations are highly fact‑specific and should always be modelled before implementation.
