Alex Conway, Director, Professional Practices

Becoming a partner in a firm for the first time is a significant milestone in an individual’s career, but also involves some substantial changes for the individual as they move from being an employee to a partner of the firm.

Below we explore some of the key changes that arise when becoming a partner for the first time in a firm.

Capital contributions

In most partnerships it is common for a new partner to make a capital contribution to the firm.

The capital provided by the new partner provides the partnership with an injection of funds and is often seen as a permanent funding source, for which the new partner in return obtains a share of the profits in the partnership.

How a partner funds their capital contribution is a personal choice. However, it is common for the contribution to be funded via way of a loan with the firm’s bankers. Where the capital is contributed via a loan, tax relief (via a deduction against taxable profits) will be available on the interest incurred on the loan, subject to certain income tax relief restrictions.

The level of capital contribution will vary between firms. However, many LLPs set the minimum level of capital contribution for junior partners based on the salaried member rules to ensure that partners are not deemed to be employees for tax purposes.

Taxation as a partner

Unlike employees, partners are not subject to tax under the Pay As You Earn (PAYE) system, which collects tax and National insurance Contributions (NIC) on a monthly basis.

Instead, partners are subject to the self-assessment regime. This means that partners will need to file an annual tax return, due 31 January following the tax year end, declaring their partnership profits and other income.

Example

Under the self-assessment regime partners will pay tax in three instalments as follows (example for 2022/23 tax year):

first payment on account – 31 January in the tax year (31 January 2022)
second payment on account – 31 July following the tax year (31 July 2022)
balancing payment – 31January following the tax year (31 January 2023).

The payments on account are 50% each of a partner’s previous year tax liability, with the balancing payment being the difference between the current year tax liability and payments on account already made.

Partners will also be subject to different classes of NIC to employees, paying Class 2 and Class 4 NIC. These are lower than NIC payments made by an employee and are currently (22/23 tax year):

Class 2 NIC – £3.15 a week
Class 4 NIC – 10.25% on taxable profits between £11,909 and £50,270 and 3.25% on taxable profits over £50,270.

Employee benefits now a partner

Typical benefits a partner might have received as an employee include employer pension contributions, private medical insurance and life insurance.

However, as a partner is treated as self-employed for tax purposes, a different tax treatment will apply.

	Employee	Partner
Pension contributions	Employer pension contributions tax-free.	No such employer pension contributions, with partners making their own contributions and claiming tax relief via their tax return.
Private medical insurance	Taxable benefit for employees.	Usually forms part of your drawings.
Permanent health insurance	Tax-free benefit for employee, although any payments from scheme will be subject to PAYE.	Usually forms part of your drawings.

For more information on the issues discussed in this article or to discuss your individual circumstances, get in touch with Alex Conway or your usual Crowe contact.

Becoming a New Partner – Three Key Points to be Aware of