The year-two problem
Your first year as a partner generates a liability payable the following January, and payments on account arrive on top of it. The practical effect is that year two can carry something like one and a half years of tax inside twelve months. It is entirely predictable and it catches almost everyone, because nobody plans drawings around it in month one.
What to establish before you sign
- What the buy-in figure is actually made of — working capital, premises, goodwill if any
- What the deed says about leaving, about disputes, and about the lease
- What profit share you are entitled to and from when
- What your Estimate of Pensionable Profits should say in your first year
Common questions
What am I actually buying when I buy in?
Rarely as simple as a share of net assets, which is why the figure needs to be built rather than accepted. It typically involves a share of working capital, possibly a share of the premises or a separate property arrangement, and an entitlement to a profit share going forward. Each of those is valued differently, and a buy-in price presented as a single number with no breakdown is one nobody can sensibly negotiate or fund. Ask for it split before you approach a lender, because they will want the same breakdown and it is far better to have produced it yourself than to have it questioned.
What will my first two years of tax look like?
Uncomfortable, if nobody warns you. Your first year as a partner generates a tax liability that is not payable until the January after the tax year ends, and payments on account then arrive on top — so the second year can carry roughly one and a half years of tax in a single twelve-month period. That is a cash flow problem rather than a tax problem, and it is entirely predictable, so it should be built into your drawings from the first month rather than discovered in month eighteen.
Should I read the partnership deed before signing?
Yes, and specifically the provisions on leaving, on what happens if partners fall out, and on what liability you take on for the premises. Where a deed is silent or badly drafted a practice can end up with a single remaining partner holding the contract and every liability attached to it, including the lease. That risk is invisible while everyone gets on and expensive the moment they do not. We are not the right people to advise on the drafting, but we will tell you what the financial provisions actually mean.
What about superannuation in my first year?
You will need an Estimate of Pensionable Profits, and it will be a guess — which is fine, provided everyone knows it is one and it is corrected later by the Annual Certificate. The risk in year one is under-estimating, because the correction then arrives as a lump against a year in which you have already drawn. We would rather set the estimate slightly high and release the difference than have you find it. The Annual Certificate for the same year is not due until nearly two years later, so an estimate that is badly wrong stays wrong for a long time before anything corrects it.