Author:
Jamie Havard
Chartered Financial Planner
Reviewed by: Megan Jenkins, Chartered Financial Planner
Becoming a partner in your chosen career is a hard-won position. It can be highly competitive, taking years of graft, without even the guarantee of the position at the end of it. So a huge congratulations on making it this far!
So, now what? What has changed?
First and foremost, you are now self-employed. Your earnings are now yours to manage, with it being your responsibility to manage your business income and expenses for your tax return. This means keeping a number of records so that you can accurately manage your drawings, unpredictable levels of profit-share, and submit your self-assessment tax return when due.
Key areas to be mindful of budgeting for are:
If your profits are greater than £12,570 (your personal allowance), you are expected to pay Class 2 and Class 4 National Insurance rates [1]. From the 6th of April 2024, only Class 4 National Insurance rates apply [2].
In conversation with Tom Merchant and Jack Munday
| 2023/24 | 2024/25 | |
|---|---|---|
| Class 2 | £3.45 per week | Nil |
| Class 4 - £12,570 - £50,270 | 9% on profits | 8% on profits |
| Class 4 – in excess of £50,270 | 2% on profits | 2% on profits |
These will be paid through your Self-Assessment, and you will therefore need to budget accordingly to meet this newfound liability.
As an employee, you were able to benefit from employee and employer pension contributions that were actioned on your behalf. Now, however, your pension is solely your responsibility and there are factors that need to be considered:
Your annual allowance is the most you can save in your pension pots in a tax year before having to pay tax. £60,000 gross is the current limit (2023/24) [5].
However, as your earnings increase, this allowance can be tapered downwards. This begins when your ‘threshold income’ is over £200,000 and ‘adjusted income’ is over £260,000. This is tapered at a rate of £1 for every £2 in excess of £260,000 of ‘adjusted income’, to a minimum annual allowance of £10,000 [6].
For example:
| Adjusted income | Tapering | Annual allowance | |
|---|---|---|---|
| Year 1 | £250,000 | £0 | £60,000 |
| Year 2 | £265,000 | £2,500 | £57,500 |
| Year 3 | £280,000 | £10,000 | £50,000 |
| Year 9 | £380,000 | £50,000 | £10,000 |
| Year 10 | £400,000 | £50,000 | £10,000 |
Being aware of this is a useful tool in tax planning; in the early stages of partnership, pensions can be utilised to save tax efficiently. However, as your earnings grow, eventually these allowances reduce, and pension tax planning is much more limited.
Whether you’ve recently divorced, sold a business or are receiving a lump sum, our advisers can help you plan for your new future. Get in touch or request a call to discuss how we can help you.
With the potential curtailing of pension contributions, alternative methods for saving tax efficiently can be sought, such as venture capital schemes. For example, venture capital trusts (VCTs) where money is invested into smaller, less well-established businesses, with potential for high levels of growth (which are exempt from capital gains tax), tax-free dividends, and 30% income tax relief on contributions made into a VCT (with some restrictions [7]).
As an employee, you will have benefitted from an employee benefits package in some form or another. This may have included, for example, ‘death-in-service’ cover, private healthcare provision, or a company car. You will now be responsible for building your own benefits package. Some things to consider and to be aware of when looking to build your package are:
As you will have gathered from my writings, there are a lot of changes that need to be planned for and kept track of. This article won’t have everything in it, but is a good place to start discussions on what you want your new role to look like and how it should benefit you.
Whether you’ve recently divorced, sold a business or are receiving a lump sum, our advisers can help you plan for your new future. Get in touch or request a call to discuss how we can help you.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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