Understanding partnerships: Employment status for partners – employed v self-employed
Depending on the structure of the firm, employment status can be a contentious issue, especially for junior partners who do not always have a guaranteed profit share and may have minimal voting rights. Partners need to satisfy at least one of three tests below to prove they are true partners in a business, and retain the tax advantages the self-employed have over employees:
- At least 20% of their remuneration must be directly dependent on the profit made by their partnership
- The partner must have at least 25% of their “disguised remuneration” at risk as part of the firm’s capital
- They must be able to prove that they have significant influence on the overall partnership.
Without meeting one of the criteria stated, you would not be treated as self-employed for tax purposes, nor would you be entitled to the employee law protections of ordinary employees, such as statutory redundancy pay. However, you would still be covered by anti-discrimination laws, working time legislation and whistleblowing policies.
“Salaried Partner” or “Income Partner” denotes a partner who is employed by the firm under an employment contract and paid a salary subject to PAYE in the UK.
“Equity Partner” denotes a partner who is self-employed.
“Consultant” can indicate a partner employed by their own Personal Service Company (PSC).
Life insurance, private medical or other insurances may have been provided as part of your remuneration package as an employee. Make sure you consider what level of cover you may want in the future, as some insurance providers may give you the option of continuing cover at a preferential rate.
This article is part of MHA MacIntyre Hudson's Roadmap to your Financial Future guide. Download the full Roadmap to your Financial Future guide from MacIntyre Hudson's website.