Author:
Jamie Havard
Financial Planner,
Saltus Asset Management Team
Reviewed by: Megan Jenkins, Chartered Financial Planner, Saltus Asset Management Team
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?
Employee to self-employed
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:
- Your core expenditure – what it costs for you to live
- Income tax liability
- National Insurance rates
- Pension contributions
- Work related expenses (such as Chambers fees, professional indemnity, licence renewal etc.).
National Insurance
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].
| 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.
Pensions are your responsibility
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:
- Can you remain within your previous pension scheme or do you need to open a new pension?
- Is it worth consolidating your pensions? [3]
- How much can you afford to save? More importantly, how much do you need to save to retire? [4]
- How much can you save without penalty?
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.
Alternative methods of tax efficient saving
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]).
Lost benefits
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:
- Am I covered in the event of ill health and unable to work and earn? Income protection policies can help by providing an income in the event that you are off of work for an extended period of time and the savings you have built up would not be enough to sustain you for this period of time.
- Are my loved ones secure financially if I were to die? If your loved ones are reliant on your earnings, or retirement is hinging on your ability to build your savings and pension, covering this with a term assurance policy for your expected working life would provide protection for this scenario. This would replace your previous death-in-service benefit.
What next?
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.
Article sources
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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.