Partnership Tax Return
Discussion
I have a simple question enough and I don't believe I wrote up a Partnership agreement at the beginning specifying the % profit split
Basically me and my Partner have a business, 1st year I split the profit on our Tax Return 50/50. For example I earnt £30k, she earnt £20k and a profit of £1k I was expecting to pay 20% tax, but we ended up paying near on 50% tax on the profit. Am I right in thinking it takes into consideration your combined wage - £50k then what tax bracket you come under at this point, ie higher tax bracket.
This time round, can I split it say 70/30 or 80/20 in her favour as she has not worked a full year of employment in her full-time role (we both have full-time jobs, this is our side business) plus she has carried out a higher % of the actual work involved in this business, due to her having more time free to do so?
If for example for this year her wages were half the previous year, would it have any effect on how much combined tax we paid if I used this 70/30 or 80/20 profit split?
Basically me and my Partner have a business, 1st year I split the profit on our Tax Return 50/50. For example I earnt £30k, she earnt £20k and a profit of £1k I was expecting to pay 20% tax, but we ended up paying near on 50% tax on the profit. Am I right in thinking it takes into consideration your combined wage - £50k then what tax bracket you come under at this point, ie higher tax bracket.
This time round, can I split it say 70/30 or 80/20 in her favour as she has not worked a full year of employment in her full-time role (we both have full-time jobs, this is our side business) plus she has carried out a higher % of the actual work involved in this business, due to her having more time free to do so?
If for example for this year her wages were half the previous year, would it have any effect on how much combined tax we paid if I used this 70/30 or 80/20 profit split?
Partners are taxed on the PROFIT of a partnership activity - NOT what the partners withdraw from the partnership.
So, say a partnership had a profit of £50,000 BEFORE the partners take out any drawings.
The taxable partnership profit is therefore £50,000.
Say the partnership agreement says the partners split the profits 50/50.
That means each partner is assessed for tax purposes on a split of partnership profits of £25,000 each.
So, say a partnership had a profit of £50,000 BEFORE the partners take out any drawings.
The taxable partnership profit is therefore £50,000.
Say the partnership agreement says the partners split the profits 50/50.
That means each partner is assessed for tax purposes on a split of partnership profits of £25,000 each.
The taxable people are the partners, not the partnership. So there's no combining the profits of the partnership for a tax return. In your case, both you and your partner will bring your share of the profits of the partnership into your tax return - based on the split as set out in the partnership agreement - not based on how much you've each drawn in cash from the partnership.
The share of partnership income is added to all your other income, and that determines whether you're a higher/additional rate tax payer.
The share of partnership income is added to all your other income, and that determines whether you're a higher/additional rate tax payer.
Ok many thanks.
1).So what I'm saying is both partners full time income is combined, plus the overall partnership profit and then if we sit overall in the higher tax bracket the tax we will incur will be based on this %. Hence we pay more.
NOT
2)Half profit to her and what tax bracket her full time and her half of the profit places her in ie lower tax bracket and her side of the tax is calculated
and then myself, again same situation ie lower tax bracket.
Meaning 1) we both pay a higher % rather than 2) we both pay a lower %?
I hope that makes sense. Just for clarity :-)
1).So what I'm saying is both partners full time income is combined, plus the overall partnership profit and then if we sit overall in the higher tax bracket the tax we will incur will be based on this %. Hence we pay more.
NOT
2)Half profit to her and what tax bracket her full time and her half of the profit places her in ie lower tax bracket and her side of the tax is calculated
and then myself, again same situation ie lower tax bracket.
Meaning 1) we both pay a higher % rather than 2) we both pay a lower %?
I hope that makes sense. Just for clarity :-)
What is the agreed profit sharing ratio as set out in the Partnership Agreement?
(I think I know what the answer will be - but that is the formal question HMRC would ask in trying to establish how partnership profits are to be assessed on each partner).
Have formal partnership trading accounts been prepared?
Are you trying to complete the partnership self assessment tax return? I assume the partnership has been allocated its own UTR number.
(I think I know what the answer will be - but that is the formal question HMRC would ask in trying to establish how partnership profits are to be assessed on each partner).
Have formal partnership trading accounts been prepared?
Are you trying to complete the partnership self assessment tax return? I assume the partnership has been allocated its own UTR number.
Eric Mc said:
What is the agreed profit sharing ratio as set out in the Partnership Agreement?
(I think I know what the answer will be - but that is the formal question HMRC would ask in trying to establish how partnership profits are to be assessed on each partner).
Have formal partnership trading accounts been prepared?
Are you trying to complete the partnership self assessment tax return? I assume the partnership has been allocated its own UTR number.
I don't think I set a profit sharing ratio out. I need to double check, but base the answer on it being flexible as I'm hoping that what I went for.(I think I know what the answer will be - but that is the formal question HMRC would ask in trying to establish how partnership profits are to be assessed on each partner).
Have formal partnership trading accounts been prepared?
Are you trying to complete the partnership self assessment tax return? I assume the partnership has been allocated its own UTR number.
But yes I agree that is the vital question.
Self Assessment Tax Return completed last year for 2015-2016 and in the process for this year 2016-2017. Yes Partnership
has its allocated UTR Number
Kingdom35 said:
I don't think I set a profit sharing ratio out. I need to double check, but base the answer on it being flexible as I'm hoping that what I went for.
But yes I agree that is the vital question.
Self Assessment Tax Return completed last year for 2015-2016 and in the process for this year 2016-2017. Yes Partnership
has its allocated UTR Number
Right - if you look at the partnership return, it states that it needs to see how the partnership profits are allocated between the partners and the amount allocated to each partner.But yes I agree that is the vital question.
Self Assessment Tax Return completed last year for 2015-2016 and in the process for this year 2016-2017. Yes Partnership
has its allocated UTR Number
Those partnership splits are based on the actual partnership taxable profit (I.e. the business profit BEFORE partners' drawings but after adjustments for disallowable expenses and/or Capital Allowance claims.
You mention "salary". Are you saying that one or both of the partners have been paid a "salary" from the partnership? If so, has this salary been processed through the PAYE system?
Eric Mc said:
Right - if you look at the partnership return, it states that it needs to see how the partnership profits are allocated between the partners and the amount allocated to each partner.
Those partnership splits are based on the actual partnership taxable profit (I.e. the business profit BEFORE partners' drawings but after adjustments for disallowable expenses and/or Capital Allowance claims.
You mention "salary". Are you saying that one or both of the partners have been paid a "salary" from the partnership? If so, has this salary been processed through the PAYE system?
Hi sorry I think ive confused you all.Those partnership splits are based on the actual partnership taxable profit (I.e. the business profit BEFORE partners' drawings but after adjustments for disallowable expenses and/or Capital Allowance claims.
You mention "salary". Are you saying that one or both of the partners have been paid a "salary" from the partnership? If so, has this salary been processed through the PAYE system?
Basically we both have a full time job, this Partnership is a side business in addition to these full time jobs.
Kingdom35 said:
Hi sorry I think ive confused you all.
Basically we both have a full time job, this Partnership is a side business in addition to these full time jobs.
Doesn't change a thing regarding what needs to goBasically we both have a full time job, this Partnership is a side business in addition to these full time jobs.
a) on the partnership tax return
b) on the partnership pages of the personal self assessment tax return
Can you answer the questions I asked in my previous post?
Eric Mc said:
1).Right - if you look at the partnership return, it states that it needs to see how the partnership profits are allocated between the partners and the amount allocated to each partner.
2).Those partnership splits are based on the actual partnership taxable profit (I.e. the business profit BEFORE partners' drawings but after adjustments for disallowable expenses and/or Capital Allowance claims.
3). You mention "salary". Are you saying that one or both of the partners have been paid a "salary" from the partnership? If so, has this salary been processed through the PAYE system?
Hi yes I know, I'm asking about the tax calculation basis in this situation:2).Those partnership splits are based on the actual partnership taxable profit (I.e. the business profit BEFORE partners' drawings but after adjustments for disallowable expenses and/or Capital Allowance claims.
3). You mention "salary". Are you saying that one or both of the partners have been paid a "salary" from the partnership? If so, has this salary been processed through the PAYE system?
My question is the tax calculation on the partnership profit, is it calculated upon a combined 2 x full salary plus the £1 profit overall of the partnership ie 2 x £25k salaries plus the £1k profit = £51k tax bracket = 40% tax on the £1k
Or is it £500 plus £25k salary for each partner = lower tax bracket
In answer to your questions
1). This is what I'm asking, as 1 partner has earnt less in there full time role (ie not the 25k ive stated) then should I place more emphasis on that partner having more profit?
2). Yes I know.
3). No I'm saying we have full time jobs away from the Partnership, no salary from the Partnership. A PAYE salary yes.
Eric Mc said:
About time you sat down with your accountant.
Thanks perhaps ive confused you as I didn't keep it simple. But in a nutshell all I'm asking is, will our two combined daytime PAYE salaries be taken as a whole, when working out the tax we pay on our equal or mixed split of Partnership profit or split into two?Id hope its the latter ie 25k plus £500 = £25,500 tax bracket achieved lower, 22% tax on £500.
Then the same for the other partner.
Anyway I can see ive probably confused you enough and employing the services of an Accountant for such a small profit, wouldn't be viable unfortunately. Thanks again for the help though
Kingdom35 said:
Eric Mc said:
About time you sat down with your accountant.
Thanks perhaps ive confused you as I didn't keep it simple. But in a nutshell all I'm asking is, will our two combined daytime PAYE salaries be taken as a whole, when working out the tax we pay on our equal or mixed split of Partnership profit or split into two?Id hope its the latter ie 25k plus £500 = £25,500 tax bracket achieved lower, 22% tax on £500.
Then the same for the other partner.
Anyway I can see ive probably confused you enough and employing the services of an Accountant for such a small profit, wouldn't be viable unfortunately. Thanks again for the help though
2. Income appears to comprise, your salary, plus YOUR share of profits
3. That determines which tax bracket YOU are in.
4. Repeat for your partner.
ie, it is entirely possible that one of you will be a lower rate payer, and the other a higher/additional rate payer.
There is no such thing as combining your income to work out the tax rate.
Kingdom35 said:
Eric Mc said:
About time you sat down with your accountant.
Thanks perhaps ive confused you as I didn't keep it simple. But in a nutshell all I'm asking is, will our two combined daytime PAYE salaries be taken as a whole, when working out the tax we pay on our equal or mixed split of Partnership profit or split into two?Id hope its the latter ie 25k plus £500 = £25,500 tax bracket achieved lower, 22% tax on £500.
Then the same for the other partner.
Anyway I can see ive probably confused you enough and employing the services of an Accountant for such a small profit, wouldn't be viable unfortunately. Thanks again for the help though
Please don't take that the wrong way, but there's a reason we have a job and a good accountant will often be able to at least save you the equivalent in tax what they cost in fees, so net effect is zero and less hassle!
Alpinestars said:
1. Your tax will be worked out individually.
2. Income appears to comprise, your salary, plus YOUR share of profits
3. That determines which tax bracket YOU are in.
4. Repeat for your partner.
ie, it is entirely possible that one of you will be a lower rate payer, and the other a higher/additional rate payer.
There is no such thing as combining your income to work out the tax rate.
Thank you, very clear and easy to understand. This is exactly how I thought it would be worked out and was confused when I seemed to pay more than what I expected last term.2. Income appears to comprise, your salary, plus YOUR share of profits
3. That determines which tax bracket YOU are in.
4. Repeat for your partner.
ie, it is entirely possible that one of you will be a lower rate payer, and the other a higher/additional rate payer.
There is no such thing as combining your income to work out the tax rate.
dirty boy said:
Given the time to deadline, it'll be difficult to get a decent accountant now, but I wouldn't have been surprised if an appointing one (guesswork obviously though) could have saved you a lot in tax and the peace of mind that it's been done correctly.
Please don't take that the wrong way, but there's a reason we have a job and a good accountant will often be able to at least save you the equivalent in tax what they cost in fees, so net effect is zero and less hassle!
Not offended at all and appreciate your comment. That i would hope is true, net effect and less hassle (more interested in the less hassle). Out of interest how much would you charge for such work? Would it be a fixed amount or time specific?Please don't take that the wrong way, but there's a reason we have a job and a good accountant will often be able to at least save you the equivalent in tax what they cost in fees, so net effect is zero and less hassle!
Kingdom35 said:
Thank you, very clear and easy to understand. This is exactly how I thought it would be worked out and was confused when I seemed to pay more than what I expected last term.
Tax rules change every year (because of the Chancellor's Budget). That means, for identical levels of income year on year, different amounts of tax will be payable.Kingdom35 said:
dirty boy said:
Given the time to deadline, it'll be difficult to get a decent accountant now, but I wouldn't have been surprised if an appointing one (guesswork obviously though) could have saved you a lot in tax and the peace of mind that it's been done correctly.
Please don't take that the wrong way, but there's a reason we have a job and a good accountant will often be able to at least save you the equivalent in tax what they cost in fees, so net effect is zero and less hassle!
Not offended at all and appreciate your comment. That i would hope is true, net effect and less hassle (more interested in the less hassle). Out of interest how much would you charge for such work? Would it be a fixed amount or time specific?Please don't take that the wrong way, but there's a reason we have a job and a good accountant will often be able to at least save you the equivalent in tax what they cost in fees, so net effect is zero and less hassle!
I like to chat to the client, look at their overall position, married, kids, partner using allowances (marriage allowance is missed by plenty of people - HMRC will sometimes pick up though) what records are being kept etc and from there you can usually quote.
Ask friends or family who run their own business....recommendation is very important and the cheapest can be false economy and the most expensive can sometimes neglect smaller entities. (sometimes..)
You could end up with a quote from £2/300 up to £5/600 at a 'wild' guess.
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