Making the step from employee to partner or director can be one of the most exciting, fulfilling moments in an individual’s career. For many, it represents the culmination of a number of years’ hard work, and a significant change in circumstances.
With this change in circumstances, it is important to remember to review your financial planning affairs, to ensure your arrangements remain fit for purpose. Below we have detailed a few key areas individuals should consider when moving to partner/director.
Pensions
Whilst employed it is likely that you were a member of a workplace pension, but upon becoming partner or director your membership of the workplace pension is likely to cease, and your entitlement to employer pension contributions end. As such, from this point forward it is now your responsibility to ensure contributions are being made to your pension.
The way this is done is likely to be different for partners and directors, as detailed below.
Partners
Partners are only able to make personal pension contributions, meaning the funds will come from your own earnings. Tax relief on these contributions will be awarded at your highest rate of Income Tax. It is likely that your pension provider will claim basic rate tax relief directly from HMRC, increasing the contribution you make. For higher and additional rate taxpayers, your further tax relief needs to be claimed via your tax return, resulting in a reduction in your tax bill.
Directors
Personal pension contributions are restricted to an individuals’ ‘net relevant earnings’, which is broadly defined as PAYE income and profit from a trade. Often, for greater tax efficiency, directors of limited companies will draw a small salary to obtain a state pension qualifying year, with the remainder of their income taken as dividends. Importantly, dividends do not count as net relevant earnings and for this reason many directors will fund their pension via employer pension contributions. These contributions are paid directly from the company, and are likely deductible for Corporation Tax purposes, with no personal tax consequences.
Protection policies
It may be that the workplace benefits you receive remain the same, or are even enhanced upon you becoming partner or director, and it is important to understand this.
Outside of workplace benefits, existing protection policies should be reviewed to ensure these still remain commensurate with your circumstances.
For example, existing life cover may need to be reviewed to reflect your change in income. For those who have borrowed to purchase equity in the business, it may be sensible to put in place cover to protect this. Shareholder/partnership protection is also worth considering to protect both your family and fellow shareholders/ directors should something happen to you.
Income protection may be of more importance now. Previously you may have had certain sick pay benefits that are no longer applicable. Or existing income protection you have in place may need to be reviewed to take account of a different form of remuneration e.g. dividends.
Savings
Partners and directors move into a different form of taxation, and instead of being taxed on an on-going, regular basis, tax will now need to be paid twice a year through self-assessment. As part of this it is essential to make provision for the tax bills in advance of when they come due, through regular saving. These funds should be in a safe, cash environment, whilst trying to ensure they are getting a competitive rate of interest. Many banks offer accounts which award regular savers with attractive bumper interest rates, meaning it often pays to shop around.
