Discover how tax works for partnerships, how you report earnings, how much you’ll pay and where you can find more reading on legally reducing your tax bill. I’ve also included some examples to help demonstrate how tax works.
Table of contents
1. How Does Tax Work in a Partnership?
Once you’ve decided to set up a partnership, then the next question that often plays on peoples mind is ‘how does tax work’? If this question is at the top of your worry list, then this guide is for you.
Confusingly, your partnership doesn’t actually pay tax! Instead, the partners of the business declare their share of the business profits on their own self-assessment tax returns, paying tax at their own rates of tax as though they were sole traders.
So let’s say you have set up a business with someone and are in a 50/50 partnership. Your partnership makes a profit of £18,000 during the tax year and you both split this profit equally, meaning you both receive £9,000 each.
Each of your need to be registered for self-assessment so that you can declare your share of the profit and pay tax according to how much your total income is. You’ll also pay Class 2 and Class 4 national insurance on your share of the partnership profits too.
1.2 How Much Income Tax Do You Pay?
Using the example above, let’s suppose you are employed by someone and run your partnership on the side. During the tax year 2021/2022, you are paid a salary of £25,000 and can see that income tax (ignore national insurance for now) of £2,486 has been deducted at source by your employer on your P60.
Income tax is a cumulative tax, meaning the more you earn the more you pay. So the amount of tax you’ll pay will be based on your combined employment and partnership earnings. Here are the current tax rates:
|Basic rate 20%||£12,571 to £50,270||£12,501 to £50,270|
|Higher rate 40%||£50,271 and £150,000||£50,001 and £150,000|
|Additional rate 45%||over £150,000||over £150,000|
In our example above, your combined earnings are £34,000 (£9,000 + £25,000). That means the income tax you’ll pay, based on your total earnings is:
£12,570 x 0% = £0
£21,430 x 20% = £4,286
Even though this is the total tax due, you will receive a credit for the £2,486 you paid through your employment when HMRC works out how much tax you need to pay them.
Your employer most likely will have given you your personal allowance (or free-pay) which is £12,570 for the tax year 2021/2022 through your payslip. But you should check whether this is the case and you can read this guide on Tax When You’re Employed and Self-Employed to find out how to do this.
1.3 How Much National Insurance Do You Pay?
Unlike income tax, national insurance is a non-cumulative tax. That means the amount and types you pay are based purely on the specific types of earnings you have.
In the example above, you are employed and on your payslip, you’ll see a deduction for Class 1 National Insurance from your gross pay. You must continue to pay this and pay Class 2 and Class 4 national insurance on your share of your partnership profits as well. The current national insurance rates are:
|Small profits threshold – no NICs below this threshold||£6,725||£6,515|
|Class 2 National Insurance||£3.15 per week||£3.05 per week|
|Small profits threshold – no NICs below this threshold||£9,880||£9,658|
|Class 4 National Insurance 10.25%||£50,270||£50,270|
|Class 4 National Insurance 3.25%||over £50,270||over £50,270|
So based on a share of partnership profits of £9,000 for the tax year, you would pay:
- Class 2 national insurance £158.60 (£3.05 x 52 weeks)
- Class 4 national insurance £0 (below the threshold of £9,658)
2. Reporting Partnership Income to HMRC
Although HMRC will calculate tax and national insurance for you, you need to report your partnership income HMRC so they know how much profit your business made to base their calculations on. As mentioned, each partner needs to report this share of income to HMRC when they fill in their tax return. Each will do this using a supplementary Partnership section. In addition, even though the partnership itself doesn’t pay any tax, a Partnership Tax Return (SA800) form needs to be submitted.
2.1 Partnership Tax Return (SA800)
Once a year, by the 31 January, two types of forms need to be submitted to HMRC – one for the partnership known as a Partnership tax return (or called an SA800 by HMRC) and another for each of the partners as part of their self assessment tax return.
The partnership tax return is a summary of the income and expenses of the business, with the option of a disclosing details of a balance sheet. There is not actually a tax calculation made at this point, because the amount of tax paid depends on the income of each of the partners but it must be submitted to HMRC before the deadline otherwise there is a £100 penalty.
It is the nominated partners responsibility to submit this return.
2.2 Self Assessment Supplementary Partnership Section
Each partner must declare their own share of the partnership profits (or loss) on their own tax returns. They show this in a dedicated section known as the Partnership Section. It repeats some of the information from the Partnership Tax Return but it allows each partner to be taxed according to their total income, not just what they’ve earned from their partnership business.