Are you a new partner in a firm?

Three key points to be aware of

Alex Conway, Partner, Professional Practices

Becoming a partner in a firm for the first time is a significant milestone in an individual’s career. However, this will involve some substantial changes for the individual as they move from 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.

Capital contributions

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

The capital injected by a new partner:

provides the partnership with funds and is often seen as a permanent funding source
provides the partner with a stake in the firm
provides the partner with a share of the profits in the partnership.

The capital contribution provided by partners is usually used as working capital.

How a partner funds their capital contribution is a personal choice. It is commonplace 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 and usually between junior and senior equity partners.

Firms will review the capital contribution provided by partners on a regular basis and when required, additional contributions may need to be injected to support future needs of the business.

Taxation as a partner

As an employee, you receive a monthly salary and are subject to tax under the Pay As You Earn (PAYE) system, which collects tax and National Insurance Contributions (NIC) on a monthly basis.

As a partner you receive monthly drawings and distributions at various times during the year. It is usual for firms to withhold tax from these amounts and hold tax reserves on a partner’s behalf and settle the partners tax as the liabilities become due.

Partners will be assessable on their share of taxable profits for the tax year ended 5 April (or 31 March, if that is the accounting year end date of the firm).

Example 1

This example is based on if the firm’s accounting date is 30 April and you become a partner on 1 May 2024.

For the 2024/25 tax year ending 5 April 2025, you will be taxed on:

April 2024 salary, plus
11/12ths taxable profit share for the year ended 30 April 2025.

For the 2025/26 tax year ending 5 April 2026, you will be taxed on:

1/12th taxable profit share for the year ended 30 April 2025, plus
11/12ths taxable profit share for the year ended 30 April 2026.

Partners will need to file an annual tax return under the self-assessment regime, which is due 31 January following the tax year end, declaring their partnership profits and other income.

Example 2

Under the self-assessment regime, partners will pay tax in three instalments as follows (example for 2024/25 tax year):

first payment on account – 31 January in the tax year (31 January 2025)
second payment on account – 31 July following the tax year (31 July 2025)
balancing payment – 31 January following the tax year (31 January 2026).

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

In the first tax year of being a new partner, it is likely that there will be no payments on account and all of the tax will be collected as a balancing payment.

Partners will also be subject to different classes of NIC to employees, being class 4 NICs only, following the removal of class 2 NICs.

For the 2024/25 tax year, the rates of class 4 NICs are as follows:

6% on taxable profits between £12,570 and £50,270
2% 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.

Basis Period Reform

Basis period form will have been fully implemented for any new partners joining in the 2024/25 tax year. Visit our basis period form hub to find out more.

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