Financial planning for equity partners

Equity partners in law firms, accountancy firms, and private equity firms. are taxed as self-employed on their share of the firm’s taxable profits, whether or not those profits are drawn. You pay income tax and Class 4 National Insurance through self-assessment: 6% on profits between £12,570 and £50,270, and 2% above that. Payments on account are due on 31 January and 31 July, with a balancing payment the following January. Most firms hold back a tax reserve from drawings, but you remain personally liable. Check that the reserve matches your actual position, especially in a year when profits rise.

Since 2024/25, law firm partners have been taxed on profits for the tax year rather than the firm’s accounting year. The one-off “transition profit” from the change is spread over five tax years by default, ending in 2027/28. So 2026/27 and 2027/28 still include an extra slice of taxable income, which can deepen the pension taper or reduce other reliefs. You can choose to bring the remaining transition profit forward, which can make sense if you expect your income or tax rates to be higher later.

You get tax relief on personal contributions of up to 100% of your earnings, within your annual allowance. For most partners in law firms, the tapered annual allowance applies: once adjusted income reaches £360,000, the allowance falls to £10,000. Carry forward of unused allowance from the previous three years can help, if you have any. Final profit shares often aren’t confirmed until after the tax year ends, so we plan contributions using realistic profit estimates to avoid an unexpected tax charge.

You’ll pay an annual allowance charge on the excess at your marginal rate, which claws back the tax relief. The charge is reported through self-assessment. If the charge is over £2,000 and your contributions to one scheme exceeded the standard £60,000 allowance, that scheme must pay the charge from your pension if you ask (“scheme pays”). Otherwise, some schemes offer this voluntarily. Partners in law firms and accountancy firms are often caught out when a strong year lifts adjusted income, so we check your position before contributions are made, not after.

Look beyond pensions:

• You and your spouse or partner can each use a £20,000 ISA allowance every year.
• A spouse with lower earnings may have more pension allowance available than you.
• Offshore investment bonds allow tax-deferred growth, with 5% annual withdrawals and no immediate tax charge.
• For experienced investors who accept high risk, Enterprise Investment Schemes and Venture Capital Trusts offer 30% and 20% income tax relief respectively, which can reduce a large self-assessment bill.

Usually, yes. Interest on a loan taken out to buy into a partnership, whether a law firm, private equity firm or accounting firm, or to fund your capital contribution, can qualify for income tax relief at your marginal rate. The relief is capped at the greater of £50,000 or 25% of your adjusted total income each year, a limit shared with certain other reliefs. We’ll also help you plan how your capital fits into your wider finances, including whether to repay the loan early and when you can expect the capital back.

Equity partners share in the firm’s profits and are usually taxed as self-employed. Fixed-share or salaried partners receive a set, or mostly set, amount. In an LLP, HMRC taxes members who meet its “salaried member” conditions as employees through PAYE. Broadly, those conditions are mostly fixed pay, limited influence over the firm and a relatively small capital contribution. Moving to full equity changes your tax, cash flow, pension options and benefits, so plan the transition well in advance.

As a partner, you’re often outside the employee safety net: sick pay, income protection and death-in-service cover may be limited or missing. Personal income protection is usually the priority, because your drawings can stop while your costs continue. Life cover, written in trust, protects your family and may be required by your partnership agreement. Some firms also arrange cover so the remaining partners can buy out a deceased partner’s share. We’ll review what your firm provides and fill the gaps.

Start at least five years ahead. The key questions are when and how your capital will be repaid (often in instalments), how your final profit share and any remaining transition profit will be taxed, and whether to time your retirement date around the tax year. We’ll build a cashflow plan to replace your partnership income from pensions, investments and returned capital. We’ll also plan your early retirement years to use lower tax bands efficiently.

Start three to five years ahead, because partners face issues employees don’t. Your final tax bills arrive after your drawings stop. If you leave before the 2027/28 tax year, any remaining basis period transition profit is taxed in your final year. Capital is usually repaid in instalments, so plan your income around that timetable. A lower income in your last year can increase your tapered pension allowance, which can make a larger contribution possible. If you stay on as a consultant, plan how that income fits with your pension withdrawals. We’ll build a cashflow plan to replace your profit share with pensions, investments and returned capital.