Whether you’re buying into a medical practice or starting your own, choosing the right business structure isn’t just a box to tick – it can influence everything from your tax bill to your future flexibility. And with recent changes like the trust tax rate increase and the IRD’s renewed focus on professional income splitting, it’s important to get it right.
Penny and Hooper: a warning for professionals
The Penny and Hooper case still casts a long shadow for doctors and other high-earning professionals. In that case, two orthopaedic surgeons used companies to reduce their taxable income by paying themselves low salaries while leaving most profits in the business. The courts ruled that this was tax avoidance – and it sparked a much stricter approach from IRD around what counts as a “commercially realistic” salary.
In plain terms: if you’re doing the work and generating the income, the IRD expects the bulk of that income to be taxed in your hands. Simply paying yourself a market salary may not be enough – particularly if the structure results in a lower overall tax bill. The closer the income is tied to your personal effort, the more scrutiny you can expect.
Trust tax rate now at 39%
Another big shift came with the 2024–25 tax year: the top trust tax rate jumped to 39%, matching the top personal income rate. This narrows the gap between trusts and other entities when it comes to tax efficiency.
While trusts still offer asset protection and estate planning advantages, they no longer provide the same tax-saving opportunities they once did – especially if you’re not distributing income to beneficiaries on lower rates.
What about using a company?
For many GPs, physios, and dentists, a company structure still makes sense – and with good reason:
- A flat 28% tax rate on retained profits
- Limited liability protection
- Flexibility to bring in new owners over time
However, if you’re taking all profits out as salary or dividends, the tax benefit may disappear. Dividends come with a top-up tax if your personal rate is higher than 28%. So while a company can offer timing benefits (e.g. spreading income or retaining funds for investment), it’s not always the clear tax winner.
It’s not always clear-cut
Some professionals – especially early in their ownership journey – may benefit from a Look-Through Company (LTC), which allows profits (or losses) to “flow through” directly to your personal tax return. This is great if you’re expecting initial losses or earning below the top tax rate. But LTCs can be inefficient for profitable practices and have limitations on the number of owners.
What we’re seeing in practice
At The Accounting Hub, we’re having more and more conversations with medical professionals who are grappling with these questions – especially as they weigh up the impact of higher trust taxes, income splitting concerns, and the desire to reinvest in their practices.
Our advice? A company is often great and will sometimes work well with its shares owned through a family trust. Everyone’s situation is different so it’s worthwhile talking through your situation before setting up your practice.