Steve Hughes, director and chartered financial planner at wealth management firm Five Wealth, discusses actionable strategies for partners at accountancy firms to optimise their personal finances
Becoming a partner is one of the most significant milestones in an accountant’s career. It is recognition of years of hard work and service to your firm. But it is also a time of great change and transition, including when it comes to financial planning.
When making partner, your future wealth becomes much more dependent on the success of your business. Some partners may remain salaried, but many will become equity partners, which involves a shift in status from employed to self-employed. In an instant, the security and protection of an employer is gone.
As an equity partner, you may face financial liabilities if the business struggles. Each firm has its own approach, but you may be required to put your own capital into the business. You will also take on new responsibilities for managing and running the firm for your share of the profits. This requires a much greater commitment, both emotionally and financially, and certain things that used to come with your job disappear.
Understanding the changes to your earnings profile
Partners should be mindful of the benefits they may lose and make adequate provisions to replace these. You may lose valuable healthcare, life or critical illness cover, in which case it would be prudent to make private provision to ensure that mortgage liabilities are covered and your family is protected.
If you have borrowed to buy into the partnership, this may also necessitate additional protection. You will also be responsible for managing your own pensions and insurances.
As the nature of your income shifts, it is important to understand the changes in your earnings profile and review your budgeting. Equity partners are entitled to a share of the firm’s profits and will pay Income Tax on their share via Self Assessment. For new partners, if this is the first time you have moved away from PAYE, be prepared to set money aside to pay tax every January and July.
A higher income also means increased tax bills, so it is even more important to take advantage of all the available tax allowances. Tax-efficient investment vehicles, like pensions and Individual Savings Accounts (ISAs), are a good starting point to ensure that you do not pay more tax than you need to.
For higher earners looking to mitigate tax, options such as Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS) may also be attractive and suitable. VCTs and EIS are higher risk investments and not suitable for everyone, so understanding and being comfortable with the investment risk is key. Do not let the tax tail wag the investment dog!
Picking up your pension
The biggest change for many partners relates to pensions. As an employee, you will invariably be part of a workplace pension scheme and benefit from pension contributions being paid into the scheme by your employer.
When you shift to equity partner, the employer subsidy towards your funding for retirement stops. Going forward, the funding responsibility solely falls on you. It is essential to review your pension provision regularly and actively make contributions to build your pot for retirement and later life.
Pensions can be a very tax efficient means of saving for the future. The initial tax relief for higher rate and additional rate taxpayers is very attractive. Making pension contributions to reduce your taxable income to below £100,000 can also help you avoid paying 60% Income Tax and preserve free childcare.
Extra care needs to be taken to assess what you can pay into your pension and ensure you stay within allowances. The Annual Allowance restricts the tax efficient savings you can make into a pension to £60,000 per annum – or 100% of your earnings if this is lower. If your total ‘adjusted’ income exceeds £260,000, however, the £60,000 allowance is tapered and reduces to as little as £10,000.
Partners often get hit with these reduced allowances. If you anticipate your income entering a range where your pension allowance will be tapered, it is wise to maximise contributions in advance to secure greater tax advantages.
You may also be able to look back up to three years and use the ‘carry forward’ rules. If you did not fully use your pension allowance in those years, you can roll over the unused portions, allowing you to make a larger, tax-efficient contribution than the current annual limit.
There is great reward and recognition in being a partner. However, it also comes with extra responsibilities and arguably a greater concentration of risk overall. It is important therefore for partners to diversify and derisk their wealth, so they do not become overly reliant on the fortunes of the business at the expense of their personal finances.
When working with partners, we aim to balance their business objectives with their personal ones to ensure the two are developed in tandem.
