Ordinary Partnerships
After sole traders, this is the simplest business structure in the UK. They’re made up of 2 or more partners working together towards a common business goal. The partners are the exclusive owners of the business and share the responsibilities, risks, and profits. This is known as ‘joint and several’ liability.
Normally, a partnership agreement will outline the liabilities, ownership share and profit split as well as what happens if a partner wants to leave, is declared bankrupt or dies.
The partnership does not need to be registered with Companies House. However, details of the partnership do need to be logged with HMRC. One of the partners acts as a ‘nominated’ partner and completes an annual partnership tax return with details of the business’s income. Each partner then submits a separate self-assessed tax return on their share of the profits.
A partnership must consist of two or more individuals. The partnership must be dissolved if one or more partners leave the business leaving one person. They can then either register as a sole trader or find new partners and re-register as a new partnership.
Essentials Tip: who (or what) can be a partner?
A partner does not have to be an actual person. For example, a limited company counts as a legal person and can therefore be a partner.
- Partners have complete control over all business decisions
- Its easy to set up with minimal start-up costs
- Profits are shared between partners
- There are no formal accounting obligations
- The workload can be shared between partners, depending on skills
- Partnerships can employ staff and contractors
- Financial reports are not made public
- Disagreements between partners on business decisions can happen
- Partners are liable for all debts and losses
- Without public financial reports, it is difficult for partnerships to raise finances from traditional lenders
paying tax
Partners are treated as being self-employed by HMRC.
Partners pay income tax and Class 2 National Insurance contributions on their share of the profits to HMRC via the self-assessment system. The Tax year runs from April 6th to April 5th of the following year.
The tax is usually paid in two instalments, no later than January 31 & July 31 of the following tax year.
Essentials Tip: who pays what
Let’s look at an ordinary partnership which makes an annual pre-tax profit of £100,000. There are three partners: A has a 55% stake; B has a 30% stake and C has a 15% stake.
Partner A would complete a self-assessment on their £55,000 share of the profits, Partner B on their £30,000 share and Partner C on their £15,000.
INCOME TAX
Individuals and sole traders are given a Personal Allowance that they can earn each year that is not taxable.
| Income Tax Rates & Thresholds (England, Wales and Northern Ireland) | ||
|---|---|---|
| Rate | 2021 – 2026 | |
| Personal Allowance | 0% | First £12,570 |
| Base Rate | 20% | £12,571 – £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional Rate | 45% | Over £125,140 |
| Income Tax Rates & Thresholds (Scotland) | ||
|---|---|---|
| Rate | 2023/24 | |
| Personal Allowance | 0% | £0 – £12,570 |
| Starter Rate | 19% | £12,571 – £14,732 |
| Scottish Basic Rate | 20% | £14,733 – £25,688 |
| Intermediate Rate | 21% | £25,689 – £43,662 |
| Higher Rate | 42% | £43,663 – £125,140 |
| Top Rate | 47% | Above £125,140 |
Individuals and sole traders with earnings over £100,000 will see a reduction to their Personal Allowance by £1 for every £2 of income above the £100,000 limit. This means anyone with an income over £125,000 does not have a Personal Allowance.
National insurance
Anyone who is self-employed with profits of £12,570 or more a year will pay the Class 2 and Class 4 National Insurance rates. These are:
| Self-Employed National Insurance Rates | |
|---|---|
| Class 4 | £3.45 a week |
| Class 4 | 9% on profits between £12,570 and £50,270 (between the Lower and Upper Profits Limit) |
| Class 4 | 2% on profits over £50,270 (above the Upper Profits Limits) |
If their profits fall below the Small Profits Threshold (£6,725 in 2023/24), someone who is self-employed will not have to pay Class 2 National Insurance.