Accountancy partner buy-in loans: funding your capital and first-year tax

As an employee you are taxed through PAYE each month. As an equity partner in a partnership or LLP you are self-employed: the firm pays you drawings, usually a set monthly sum below your expected profit share with a balance once the accounts are finalised, and you pay your own income tax and Class 4 National Insurance through self-assessment.

The timing catches many new partners out. Your first self-assessment bill as a partner can include the full tax on your first year's profit share plus the first of HMRC's payments on account towards the following year, so one January payment can approach one and a half years of tax. Since the move to taxing partnership profits on a tax year basis, firms with accounting years that do not end on 31 March or 5 April must apportion profits across tax years, which can make your first figures harder to estimate.

Many firms hold back a tax reserve from drawings; some do not. If yours does not, plan for the bill when you plan the buy-in. Some lenders will fund both at once, and our pages on tax funding for accountancy firms and income tax loans explain how tax bills can be spread. Shareholder-directors of an incorporated firm face a similar effect when a large part of their income moves from salary to dividends.

Illustration using made-up round figures, for explanation only: not a quote, a finance offer or tax advice.

• A salaried partner is offered equity in an LLP and asked to contribute £80,000 of capital.
• They take an £80,000 personal capital loan over five years, repaid from monthly drawings.
• In their first full year as a member, drawings are set below the expected profit share, with the balance paid after the accounts are signed.
• The following January they owe the tax on that first year's profit share plus a first payment on account for the next year, with no earlier payments on account to offset.
• Without a firm tax reserve, that January payment and the loan repayments fall in the same month. Planning for both at the outset, by setting drawings, arranging tax funding or retaining profit, avoids a forced short-term borrowing decision later.

Your capital is at risk if the firm fails, and the loan remains repayable in full. If you leave or are asked to retire, the agreement may repay your capital in instalments over a long period while your loan repayments continue, so check the exit terms as closely as the entry terms. In a general partnership you also share liability for the firm's debts; an LLP limits that, which is one reason many practices have converted, as our guide to limited companies and LLPs explains.

A personal guarantee is not usually needed for a loan you take personally, because you are the borrower, but read what the loan agreement allows the lender to do if you default. Take independent legal advice on the agreement, separate from the firm's own solicitor. Borrowing of £25,000 or less by sole traders and small partnerships can be regulated consumer credit, which brings additional protections.