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Becoming an Equity Partner: A Guide to Tax, Pensions & Wealth for Legal Professionals

As Lawyers progress their career, they may have the opportunity to become an Equity Partner in the legal firm that they work for.

Many legal firms operate as a Limited Liability Partnership (LLP).  This means that an Equity Partner will have a self-employed status.  Whereas other professionals, such as accountancy, will offer a Director role and shareholding of a Limited company.

The reward of becoming an Equity Partner at a Legal firm does come at a cost.  The self-employed status means that the individual will no longer be eligible for employee benefits, such as employer pension contributions, death in service, income protection and private medical care.  Partner’s must then “self fund” these benefits to ensure they continue to have adequate financial provision.

Let’s consider pension contributions in particular.  The investment in human capital it takes to become a Partner should not be to the detriment of funding life beyond work.  The Partner should continue to make plans to achieve financial independence by their desired age to stop work.  Pensions remain a tax efficient way to save and invest, with Income Tax relief available at the Partner’s marginal rate.  Earnings above £75,000 in Scotland are subject to Income Tax at 45%, and earnings above £125,140 are subject to tax at 48%.

The good news for Partners of legal firms is that the self-employed pay lower rates of National Insurance Contributions than the employed. If your share of profit exceeds £12,570, you will pay class 4 contributions of 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270

If a Partner were to have profits of £100,000 per annum, the class 4 contribution would be £3,256.60.  Comparing this to a Director of a Limited company with the same earnings, their class 1 National Insurance liability would be £4,010.60.  The self-employed status working in the Partner’s favour.

If you’re an Equity Partner or considering this step in your legal career, our team of financial planners and tax consultants can help you understand the financial implications and make the most of the opportunities it brings.

 

Acumen Financial Planning and Enrich Tax Consultancy offer a collaborative approach to financial planning and tax advice and are familiar with the different employment statuses for professionals.