Salaried Partner to Self Employed in LLP
Discussion
I'm a salaried partner in an LLP and the firm are looking into the SP's becoming self employed. My understanding is that this will give both the employer and employee tax breaks. But what are these breaks and how are they likely to affect me? We've got some accountants coming in to talk to us in a month and explain the processes and benefits, however, I'd like to start my investigations early - forwarned is forarmed.
Anyone able to explain?
Cheers
Anyone able to explain?
Cheers
MOST partners in partnerships (both limited and non-limited partnerships) are taxed on a system which is very similar to the way in which Self Employed individuals are taxed. However, technically they are NOT self employed themselves and therefore they themselves cannot claim expenses against their personal income the way a self employed individual can.
Ordinary partners are taxed on their personal share of the partnership profits. The partnership profits are usually set in advance as a percentage of the profits for the year.
Technically, a partner can be taxed on money they actually haven't had. Share of profits means exactly that. It is not "Drawings" - although with a bit of clever manipulation of profit sharing ratios, the share of profit allocated to an individual partner can be made to equate very closely to their "Drawings" level. HMRC are wary of partnership profits which appear to have been manipulated in this way so suuch manoeuvering needs to be planned and executed very carefully.
Obviously, paying ordinary salaries to people means those individuals suffer PAYE tax and Class 1 Employee's NI deductions - which are relatively expensive. The real cost to the business is that the employer must also pay over to HMRC the Employer's NI contribution - which is 12.8% of the Gross Salary.
The good point about salaries is that they are a legitimate business expense and are therefore deductable for tax purposes by the business.
Moving partners over to a profit share removes the need to deduct PAYE and Employee's Class 1 NI which means that the individual will get more into their hands. In addition, the employer will not have to fund Employer's NI.
The downside here is that the individual must remember that he needs to account for his own Income Tax on his profit share under the Self Assessment tax system. He must also account for Class 4 and Class 2 NI from his own resources. This means he needs to be aware that the money he has received from the partnership is not all his and some must be set aside for future tax and NI payments.
The partnership will no longer be able to claim the payments made to the individual as a tax deductable cost as actual payments to partners are treated as "Drawings" which are not deducted from the business profits for tax purposes.
Moving from Salary to Share of Profits is quite a fundamental move. There are non-tax issues to be aware of as well. Historically, partners have always been joint and severally liable for the liabilities of the entire partnership. Obviously, the limited liability partnership does lessen the risk of being asked to fund the business liabilities, but there is still some risk there.
So, before agreeing to come out of "salary" and moveing to "share of profits", So I would be keen to seek legal advice as well as pure accounting and tax advice.
Ordinary partners are taxed on their personal share of the partnership profits. The partnership profits are usually set in advance as a percentage of the profits for the year.
Technically, a partner can be taxed on money they actually haven't had. Share of profits means exactly that. It is not "Drawings" - although with a bit of clever manipulation of profit sharing ratios, the share of profit allocated to an individual partner can be made to equate very closely to their "Drawings" level. HMRC are wary of partnership profits which appear to have been manipulated in this way so suuch manoeuvering needs to be planned and executed very carefully.
Obviously, paying ordinary salaries to people means those individuals suffer PAYE tax and Class 1 Employee's NI deductions - which are relatively expensive. The real cost to the business is that the employer must also pay over to HMRC the Employer's NI contribution - which is 12.8% of the Gross Salary.
The good point about salaries is that they are a legitimate business expense and are therefore deductable for tax purposes by the business.
Moving partners over to a profit share removes the need to deduct PAYE and Employee's Class 1 NI which means that the individual will get more into their hands. In addition, the employer will not have to fund Employer's NI.
The downside here is that the individual must remember that he needs to account for his own Income Tax on his profit share under the Self Assessment tax system. He must also account for Class 4 and Class 2 NI from his own resources. This means he needs to be aware that the money he has received from the partnership is not all his and some must be set aside for future tax and NI payments.
The partnership will no longer be able to claim the payments made to the individual as a tax deductable cost as actual payments to partners are treated as "Drawings" which are not deducted from the business profits for tax purposes.
Moving from Salary to Share of Profits is quite a fundamental move. There are non-tax issues to be aware of as well. Historically, partners have always been joint and severally liable for the liabilities of the entire partnership. Obviously, the limited liability partnership does lessen the risk of being asked to fund the business liabilities, but there is still some risk there.
So, before agreeing to come out of "salary" and moveing to "share of profits", So I would be keen to seek legal advice as well as pure accounting and tax advice.
Edited by Eric Mc on Tuesday 2nd February 09:27
I too am in a similar situation. We have an accountancy firm coming to see us in a few weeks to discuss it.
From what I gather (and this could be completely wrong!)
You can set up another company which contracts you out to your existing company (basically administers your payroll). Each individual holds a number of shares in the new company that is proportional to their salary. The new company pays everyone minimum wage, and then a monthly dividend on the shares (balance of your pay). This way you only pay national insurance on the minimum wage, you only pay dividend rate of tax on the dividend. If you have a company car you will only pay the lower tax rate on it, and you can also claim petrol miles from your home to your contracted place of work (I think).
Like I said I could be completely wrong!!!! But I am going to look into it further... and would be very interested to hear from anyone else who has or is looking at a similar scheme.
Or if someone can tell me that this is all wrong and that more than likely I could expect a huge tax bill in the future it something like this was set up.
From what I gather (and this could be completely wrong!)
You can set up another company which contracts you out to your existing company (basically administers your payroll). Each individual holds a number of shares in the new company that is proportional to their salary. The new company pays everyone minimum wage, and then a monthly dividend on the shares (balance of your pay). This way you only pay national insurance on the minimum wage, you only pay dividend rate of tax on the dividend. If you have a company car you will only pay the lower tax rate on it, and you can also claim petrol miles from your home to your contracted place of work (I think).
Like I said I could be completely wrong!!!! But I am going to look into it further... and would be very interested to hear from anyone else who has or is looking at a similar scheme.
Or if someone can tell me that this is all wrong and that more than likely I could expect a huge tax bill in the future it something like this was set up.
Eric, many thanks for your detailed response. I think that I have explained myself badly. In my case, Partner is just a title and I am essentially an employee of the company drawing a salary, there are very few Equity Partners in our firm and I am definately not one, I do not have a share of the company.
What I was trying to get across is that I am reasonably senior and one step away from Equity. It is only the senior members of staff (Salaried Partners) that are being asked to join this scheme, therefore, the people below me will continue to be PAYE staff and the people above me will continue to own the firm, I think - obviously still awaiting an explanation of what the technicalities are.
What I was trying to get across is that I am reasonably senior and one step away from Equity. It is only the senior members of staff (Salaried Partners) that are being asked to join this scheme, therefore, the people below me will continue to be PAYE staff and the people above me will continue to own the firm, I think - obviously still awaiting an explanation of what the technicalities are.
If you switch to "share of profit" rather than "salary" - you, by default, become an equity partner as you are now sharing in the equity of the business i.e. its profits.
This is perfectly allowable with partnerships and always has been.
However, if you are going to somewhow be paid on a "self employed" basis but the real relationship is still that of an employer/employee, then HMRC will take a very dim view of this. You are either an employee or a partner. You cannot be a "self employed" employee.
This is perfectly allowable with partnerships and always has been.
However, if you are going to somewhow be paid on a "self employed" basis but the real relationship is still that of an employer/employee, then HMRC will take a very dim view of this. You are either an employee or a partner. You cannot be a "self employed" employee.
Just check out the entire impact of the new arrangement on you personally. Don't be blinded purely by the perceived tax advantages.
Apart from the tax and legal liability aspects of a change of status, there are also employment issues, such as employer's liability, redundancy rights, discrimination rights, what to do in the case of dismissal etc etc etc.
On the employer's liability, they have obligations to YOU as an employee. If you become a partner, you could have employer liabilities to the remaining bona fide emoployees.
Don't forget, they will be selling the idea to you primarilly for THEIR advantage so do not take their advice as being totally even handed.
Apart from the tax and legal liability aspects of a change of status, there are also employment issues, such as employer's liability, redundancy rights, discrimination rights, what to do in the case of dismissal etc etc etc.
On the employer's liability, they have obligations to YOU as an employee. If you become a partner, you could have employer liabilities to the remaining bona fide emoployees.
Don't forget, they will be selling the idea to you primarilly for THEIR advantage so do not take their advice as being totally even handed.
One final tax point.
If you DO go on to a "share of partnership profit" basis for tax purposes, you might find that your first January tax payment is very high.
January is when people pay their Self Assessment tax liabilities.
Say, having completed your Self Assessment tax return you discover you have a tax liability for tax year 2010/11 of £15,000. This will be payable in full on 31 January 2012. However, the really sore aspect is that you will be asked to make a Payment on Account for the NEXT tax year (2011/12) as well ON THE SAME DAY. This Payment on Account is always set at 50% of the previous year's tax liability. In this example, the Payment on Account would come to £7,500 - leaving you with a tax payment to make on 31 January 2012 of £22,500. That can be quite a shock for a first time Self Assessment tax payer.
A second Payment on Account of £7,500 would also be due and payable on 31 July 2012.
Obviously, once you get into the swing of submitting Self Assessment tax returns and have been making your regular Payments on Account each January and July, the shock factor of the amount payable on 31 January isn't usually so great.
Just be aware of the ramifications.
If you DO go on to a "share of partnership profit" basis for tax purposes, you might find that your first January tax payment is very high.
January is when people pay their Self Assessment tax liabilities.
Say, having completed your Self Assessment tax return you discover you have a tax liability for tax year 2010/11 of £15,000. This will be payable in full on 31 January 2012. However, the really sore aspect is that you will be asked to make a Payment on Account for the NEXT tax year (2011/12) as well ON THE SAME DAY. This Payment on Account is always set at 50% of the previous year's tax liability. In this example, the Payment on Account would come to £7,500 - leaving you with a tax payment to make on 31 January 2012 of £22,500. That can be quite a shock for a first time Self Assessment tax payer.
A second Payment on Account of £7,500 would also be due and payable on 31 July 2012.
Obviously, once you get into the swing of submitting Self Assessment tax returns and have been making your regular Payments on Account each January and July, the shock factor of the amount payable on 31 January isn't usually so great.
Just be aware of the ramifications.
Edited by Eric Mc on Tuesday 2nd February 13:43
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