How to Set Up a Partnership with HMRC

Learn how to set up a partnership, register it with HMRC as well as finding out a few extra things you may want to think about as part of your registration like choosing a name and partnership agreements.

Updated 19 August 2021

1. Check Registering a Partnership is Right for You

First things first, before you launch into setting up a partnership, you should make sure it is right for you. A partnership is a UK business structure that is similar to a sole trader but allows two or more people to co-own a business, with each of the partners being responsible for debts, as well as being entitled to a share of the profits. There are alternative business structures available including self-employed (or sole trader) and a limited company. Read this guide for more information on choosing the right legal structure for your new business.

People generally opt to set up a partnership when they:

  • Go into business with someone else;
  • Want to have a formal arrangement for sharing profits with someone they work with.

2. The Pros and Cons of Setting Up a Partnership

As with any business structure, there are pros and cons of setting them up. Here are some that you should be aware of if you are planning to register a partnership:

Pros

  • A partnership agreement can be drawn up to formalise the arrangement between the partners, offering greater protection and avoiding any tricky issues in the future;
  • Partnerships are free to set up on the HMRC website;
  • Minimal reporting requirements;
  • You share the costs and responsibilities of your new business with someone else;
  • You have someone else to put in start-up capital;
  • It’s simpler to close down a partnership than a Limited Company if things don’t work out.

Cons

  • You risk being made liable for debts you are not aware of or did not agree to by your partner(s);
  • Running a new business with someone else can be difficult especially if you have never worked together;
  • You have to share your business profits;
  • Depending on your business profits, a partnership may not be the most tax-efficient business structure.

3. What is a Partnership Agreement?

To avoid problems arising, it is advisable to put together a partnership agreement that formalises important information such as:

  • How profits will be split;
  • How costs will be split;
  • Any other important business arrangements between the partners.

You may need to contact a solicitor to assist you with this.

4. When Do You Need to Register Your Partnership?

You need to register your Partnership by the 5th October following the end of the tax year** you started trading. So if you started your new business on 1 February 2020, you’ll need to register your partnership with HMRC by 5th October 2020.

** A tax year runs from 6 April to 5 April each year.

5. Choosing a Name for your Partnership

There are some rules you need to follow when it comes to choosing a name for your partnership. I’ve put together a list of Do’s and Don’ts when it comes to naming your business, but essentially you can choose any name you like although you cannot use:

  • Anything explicit;
  • Words like LLP or Limited as those are reserved for business that is registered with Companies House.

6. Choose a Nominated Partner

Every partnership needs to elect a nominated partner who will be responsible for ensuring the Partnership Tax Return is filed, keeping business records and will act as the point of contact for HMRC.

7. Set Up Your Partnership with HMRC

You can register your Partnership online on the HMRC website. It’s also very important to note that in addition to registering the partnership, each partner in the business must register as self-employed (or sole trader) because they will need to fill out a tax return each year showing their portion of any profit or losses, and paying any tax due on this.

8. What Tax Do You Pay in a Partnership?

The Partnership itself needs to fill out it’s own tax return (known as an SA800 partnership tax return) summarising how much money the business has made.

Then each member of the Partnership must report their portion of income and expenses on their own personal tax return, paying tax in the same way as someone who is self-employed. That means they will be liable to pay the following, depending on their profits:

  • Income tax
  • Class 2 national insurance
  • Class 4 national insurance

The amount of each that you pay depends on your portion of the partnership business profits and you can read a full guide to self-employment taxes here, which includes examples.

9. Reporting Requirements

You will need to let HMRC know that you are in a partnership and nominate the partner who will be responsible for the partnership tax returns and administration. Both the partnership tax returns and individual tax returns are due by 31 January each year (there is are penalties starting at £100 for both the partnerships and partners for missing this deadline). You can find out more about tax dates here.

Tax payments are due by this date as well, with a mid-year tax instalment due by 31 July (aka a payment on account).

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About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.