A practical tax guide for general partnerships

The firm is transparent for Income Tax

A traditional general partnership is not a Corporation Tax payer. Profits are calculated for the partnership, allocated according to the agreed profit-sharing ratio, and each partner pays Income Tax and National Insurance on their allocation through Self Assessment.

HMRC still wants a partnership return (SA800) that ties to the accounts. Partners cannot each invent a different profit figure. If the partnership return and the partner returns disagree, expect correspondence.

Drawings are not salary

Partners taking cash from the bank is drawings, not PAYE, unless someone is genuinely employed by the firm. Mixing a ‘salary’ for one partner into the accounts without a proper allocation clause confuses both the SA800 and the partner pages.

Capital introduced, current accounts and interest on capital should be written down. Verbal ‘we’ll sort it at the year end’ arrangements collapse the first time a partner leaves.

• Keep a signed profit-sharing agreement.
• Register the partnership and each partner as required — see registering as a partner.
• Put VAT on the partnership registration, not on a random partner’s UTR, if the firm is VAT-registered.

When an LLP or company is a better wrapper

Limited liability partnerships and limited companies are different legal persons with different tax. Do not assume a general partnership is ‘simpler’ once you have premises, staff or outside investors. Read LLP versus limited company before you change structure.

Solaratax prepares partnership accounts, the SA800 and the partner returns so the set matches. Get in touch if a partner has joined or left mid-year — that is where allocations go wrong.

Questions we are asked

Does the partnership pay the partners’ tax?

Not automatically. Each partner is responsible for their Self Assessment bill unless you agree privately to reserve cash in the firm for tax.

Can a partnership employ people?

Yes. Employees of the partnership go through PAYE. Partners themselves are not employees of the partnership.

Is a husband-and-wife firm a partnership?

It can be, if you are carrying on business together with a view to profit. Informal ‘helping out’ without a profit share is a different analysis and can cause NIC and employment issues.