There are a few tax issues to be aware of when transitioning from an employee to a partner. The below details the scenario of your tax position as an employee and what it would mean for you becoming a partner. If you are a Limited Liability Partnership (LLP) member, all comments below are subject to you being treated as self-employed for Income Tax and National Insurance (NI) under the Salaried Member Rules.

Employment status

As an employee, you are taxed on the income received each month (or other agreed period), with Income Tax and NI deducted at source through the payroll under Pay As You Earn (PAYE). As a partner, you are taxed on your share of the profits of your partnership, based on your agreed profit-sharing ratio. This may differ from your drawings.

When you become a partner however, you will be required to file an annual Self-Assessment tax return and are likely to be required to make tax payments on account, twice a year:

• On 31 January (within the tax year)
• On 31 July (after the tax year ends)

Each payment on account is usually 50% of the previous tax year’s liability. In addition, a balancing payment may be due on 31 January following the end of the tax year.

National Insurance Contributions

As an employee, you are subject to Class 1 National Insurance Contributions (NICs). In 2024/25, the rate for earnings between £12,570 per year and £50,270 is 8%, with earnings in excess of £50,270 at a rate of 2%. Your NICs are deducted from your salary by the employer.

However, as a partner, from 2024/25, you will be subject to Class 4 NICs. It is also possible to pay Class NIC, voluntarily.

For 2023/24, Class 4 NICs are paid at 6% on your annual taxable profits between £12,570 and £50,270, and a further 2% on profits over £50,270.

During the year of transition, you are likely to have paid Class 1 NICs on your employment income. Where an individual is both employed and self-employed in a tax year, the ‘annual maxima’ is calculated to allow for relief for the individual who is essentially paying Class 1 and Class 4 NICs in one year.

Benefits and expenses

Any benefits you receive as an employee are either reported through payroll or via a P11D form. Any benefits you receive as a partner are disallowed within the firm’s tax computation, therefore no tax relief is obtained.

As an employee, your employer would normally reimburse business expenses on the basis that the expense is directly related to your employment. When you become a partner, it is similarly important that all business expenses are accounted for in the partnership’s annual tax return.

Pension

As an employee, you are usually part of the workplace pension and employee contributions are complemented by the employer’s contributions. As a partner, you are solely responsible for your own pension and there are no employer contributions. It should be noted that in the year of transition, caution should be taken as you will need to ensure you do not exceed the pensions annual allowance. Pension contributions in excess of the annual allowance of £60,000 can result in a tax charge at your marginal rate (up to 45%). This allowance is reduced for higher earners.

Registering as a partner

To begin the transition to a partner, an SA401 form should be completed by the individual joining the partnership.

If you would like to discuss your transition from employee to partner in more detail, please reach out to Kiran Chotai, Private Client Senior Manager, or your usual haysmacintyre contact.