Lawyer Monthly Magazine - August 2019 Edition

Funding a capital contribution It is usual when you become a partner to contribute capital into the business. Due to salaried members legislation, it is key that capital contributed by new partners is paid into the firm within two months of becoming a partner, if the firm is an LLP. Often the capital contribution is borrowed by partners and firms usually have a working relationship with their bankers to provide a competitive rate of interest. Partners will receive tax relief on the interest paid on their borrowings. It may, therefore, be beneficial to pay off other loans before the loan to contribute capital or even employ funds elsewhere to achieve a superior rate of return. Once you cease being a partner there is no tax relief available on interest paid after that date. Therefore, care needs to taken when capital is repaid. Financial Planning The transition from employed to self-employed when becoming a partner means that, for many, all of the employee benefits that you previously took for granted now disappear, and you are left to make your own provision. This is particularly relevant to pension contributions, where you will no longer be eligible There is also the opportunity to carry forwardany unusedannual allowance from the previous three tax years. Individuals may be able to ‘catch up’ on past payments and still benefit from 45% tax relief. A calculation should be done to determine any unused allowances and to establish your capacity for making pension contributions. Newly appointed partners should also check on whether they benefit from arrangements, such as partner life insurance, income protection and private medical insurance. If these insurances are not offered by the partnership, then you need to consider your personal requirements and take out private cover. Other aspects need to be considered, such as: • How easy (or otherwise) it is to obtain amortgage now that you have become self employed, your strategy for repaying any mortgage debt to join the firm’s scheme and benefit from employer contributions, but instead, have to pay these contributions personally. The secret to success is to commence making pension contributions at your earliest opportunity so that you get into the discipline of saving and benefit from the generated income tax reliefs associated with pension contributions. These can be as high as 45% for higher rate taxpayers. This means that for every £10,000 that goes into your pension fund, the net cost to you will be just £5,500, and there is no better tax-efficient way to save for your retirement. However, the annual allowance for pension contributions (the maximum you can contribute in to pension funds and benefit from tax relief) is just £40,000 per tax year. This allowance is then reduced for those individuals deemed to be ‘high earners’ by £1 for every £2 of income between £150,000 and £210,000 so that, for individuals earning in excess of £210,000, the annual allowance is restricted to just £10,000. Depending on where you are in your earnings journey, you may need to prioritise pension contributions in the early years of partnership, as your funding options may become restricted as your earnings grow. • Alternative savings options for retirement such as Individual Savings Accounts (ISAs), cash reserves • Other tax advantaged savings vehicles such as Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS). It is important to remember that pensions and ISAs are merely tax structures and that it is the underlying investment strategy that is key to the success of your planning. Having a good understanding of where your monies are invested and how these reflect your attitude to risk and capacity for loss are of paramount importance. The appointment to partner provides you with the opportunity to review your financial planning and use your earnings to your best advantage. Specialist advice should be sought to ensure that you are optimising the tax efficiency of your planning and are on track to achieve your financial objectives. LM 23 AUG 2019 | WWW.LAWYER-MONTHLY.COM Special Feature By Nicky Owen, Ryan Ketteringham & Phil Smithyes, Crowe “Newly appointed partners should also check on whether they benefit from arrangements, such as partner life insurance, income protection and private medical insurance.”