Becoming an equity partner is, financially, very different from being an employee. Colin Tomlinson of Pareto Financial Planning explains the implications.

Becoming an equity partner is a big milestone and understandably a proud moment for many. It often marks the shift from being a technical expert to becoming a business owner. With that shift comes a host of financial changes, the impact of which are often underestimated.

Equity partners will typically need more proactive tax planning advice and cashflow management, particularly in the early years.

Whether you're considering a partnership offer, or helping team members step up, it’s worth taking time to understand what actually changes financially, legally and personally when you become an equity partner.

It’s not just a title change

On the surface, becoming a partner can look like a natural progression. However, in financial terms, this step is more like becoming a shareholder in a private business than just getting a promotion. That means:

• You’ll likely be self-employed (not on PAYE).

• You may need to invest capital into the firm.

• Taking on personal liability for business risk.

• Accepting income fluctuations based on firm performance.

• Your tax responsibilities will increase and shift in timing.

Change in income structure

As an employee, your income is regular, with tax and national insurance handled through PAYE. As an equity partner, you usually become self-employed. That means:

• No more monthly salary as such.

• Income derived from profit share, which may vary.

• You’ll be responsible for your own income tax payments via Self-Assessment.

• You may need to make payments on account.

Many new partners underestimate their first-year tax liability. Being prepared and putting aside money regularly to manage tax and cashflow becomes crucial.

Capital contributions

You may be asked to buy into the business. This could be:

• A fixed sum for a percentage of ownership.

• A loan arrangement, often funded by a bank (sometimes facilitated by the firm).

This capital contribution is typically used to fund working capital or balance sheets, it’s not just symbolic. Important things to understand here include:

• Whether the capital is refundable if you leave (and on what terms).

• If you're taking out a loan, whether you're personally liable or the firm supports repayments.

•  How profit distributions are calculated - are you rewarded purely on equity percentage, performance, or both?

Exposure to risk

As an equity partner, you’re no longer shielded by the same employment protections. You may also share liability for things like:

• Professional negligence (depending on your structure).

• Lease agreements or business loans.

• Compliance breaches or regulatory fines.

In some cases, you may need:

• Additional insurance such as professional indemnity or life cover tied to your business liabilities.

• A more robust personal financial safety net including income protection or critical illness cover.

A 2024 Legal & General study revealed that one in ten partners in professional firms suffer a long-term health condition that leads to absence lasting six months or more during their working life. Having cover in place to assist with this can be invaluable.

Pensions and financial planning

As a partner, you’ll need to manage your own pension planning. You’re unlikely to be enrolled into a workplace pension anymore, and contributions aren’t deducted from your income in the same way.

You can still make tax-efficient pension contributions, but it’s your responsibility to plan them. Similarly, if your income goes up, you may hit thresholds like:

• The tapered annual allowance: the annual allowance limits the amount one can contribute to a pension to £60,000 per annum (or 100% of your earnings if lower). If your total “adjusted” income exceeds £260,000, the annual allowance (the amount you can contribute to a pension and receive tax relief) is gradually tapered to potentially as little as £10,000.

• A higher effective tax rate on certain bands of income.

Equity partners, in particular, benefit from working with a financial planner who can help them navigate the pensions rules and optimise contributions.

Exit planning starts earlier than you think

Most new partners are so focused on getting in, they forget to think about getting out.

But your capital contribution, profit share arrangements and retirement planning are all linked to the firm’s structure and rules. Key questions to consider:

• Will you get your capital back on exit?

• Is there a goodwill payment when you retire?

• What happens if you become ill or want to leave earlier than expected?

Final thoughts

Becoming an equity partner is a brilliant achievement and it comes with huge opportunities. But it’s not just about status or a pay rise. It’s a business decision, with real financial implications. Taking advice early, ideally before you accept the offer, could help you go in with your eyes open and your finances in good shape.

And for practices looking to promote the next generation, supporting your rising stars through that transition could help you build a stronger, more stable senior leadership team for the long term.

Disclaimer

This blog provides general information and should not be taken as personal financial advice. Everyone’s situation is different – please speak to a qualified financial adviser before making any financial decisions.

While we aim to ensure the information provided is accurate and up-to-date, we cannot guarantee its accuracy in the future. We are not responsible for any loss caused by decisions made based on this content.

Tax rules, rates, and reliefs can change. How they affect you will depend on your personal circumstances. The Financial Conduct Authority (FCA) does not regulate estate planning, trusts, wills or tax advice.

Pareto Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.

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