Partnership - getting paid...
Discussion
I am a Partner in a business; two of my brothers and I set up.
We all work in other full time jobs as the business grows and work on our business whenever we have spare time. We dont pay eachother as all our money gets reinvested into the business.
Its growing enough that we will soon need to employ one person fulltime and its very likely to be me.
What is the best way to pay me a salary separate from the profit we would split as equal partners?
Should I set up a PAYE system? Or can I not be an employee as I am a Partner?
We all work in other full time jobs as the business grows and work on our business whenever we have spare time. We dont pay eachother as all our money gets reinvested into the business.
Its growing enough that we will soon need to employ one person fulltime and its very likely to be me.
What is the best way to pay me a salary separate from the profit we would split as equal partners?
Should I set up a PAYE system? Or can I not be an employee as I am a Partner?
Partners NEVER pay tax under the PAYE system on their income from a partnership. They are not employees.
Even if the partners look on the payments as "salary" (i.e. a "Salaried" Partner) the tax and National Insurance araising on that income is still calculated under the "Share of Partnership Profit" rules.
Have you notified the Revenue that the partnership is in existence?
Have you sorted out your monthly/quarterly Class 2 National Insurance payments?
Have you applied for exemption from having to pay this Class 2 NI if appropriate?
Even if the partners look on the payments as "salary" (i.e. a "Salaried" Partner) the tax and National Insurance araising on that income is still calculated under the "Share of Partnership Profit" rules.
Have you notified the Revenue that the partnership is in existence?
Have you sorted out your monthly/quarterly Class 2 National Insurance payments?
Have you applied for exemption from having to pay this Class 2 NI if appropriate?
Edited by Eric Mc on Wednesday 11th July 10:25
Eric Mc said:
Partners NEVER pay tax under the PAYE system on their income from a partnership. They are not employees.
Even if the partners look on the payments as "salary" (i.e. a "Salaried" Partner) the tax and National Insurance araising on that income is still calculated under the "Share of Partnership Profit" rules.
Have you notified the Revenue that the partnership is in existence?
Have you sorted out your monthly/quarterly Class 2 National Insurance payments?
Have you applied for exemption from having to pay this Class 2 NI if appropriate?
All forms are sent and i've checked to make sure they have them so thats okEven if the partners look on the payments as "salary" (i.e. a "Salaried" Partner) the tax and National Insurance araising on that income is still calculated under the "Share of Partnership Profit" rules.
Have you notified the Revenue that the partnership is in existence?
Have you sorted out your monthly/quarterly Class 2 National Insurance payments?
Have you applied for exemption from having to pay this Class 2 NI if appropriate?
Edited by Eric Mc on Wednesday 11th July 10:25
They are sending out the exemption forms as we will be under the £4.5k profit threash-hold at the moment anyway as all money is reinvested in the business currently.
So if I was the only one full time working in the business I would pay myself a salary each month and therefore the NI class 2 contribution every 3 months. I then declare the earnings at the end of the tax year and any additional profit which would be split between the three of us?
That's how it works. Partners are not assessed on what they "take" from the partnership (i.e. "Drawings" ), they are based on their share of the Net Taxable Profits.
Be careful about whether you are genuinely under the magic "Small Earnings Exception" threshold.
This is based on what used to be called the Schedule D taxable profit of the business i.e. the profit after deducting the tax allowable day to day business expenses and the Capital Allowances applicable and claimed on Fixed Assets.
You refer to "reinvesting" in the partnership. What do you mean by this?
If it means buying capital assets, the cost of these WOULD NOT BE ALLOWED when working out the net profit of the business for either tax or NI purposes..
Be careful about whether you are genuinely under the magic "Small Earnings Exception" threshold.
This is based on what used to be called the Schedule D taxable profit of the business i.e. the profit after deducting the tax allowable day to day business expenses and the Capital Allowances applicable and claimed on Fixed Assets.
You refer to "reinvesting" in the partnership. What do you mean by this?
If it means buying capital assets, the cost of these WOULD NOT BE ALLOWED when working out the net profit of the business for either tax or NI purposes..
Edited by Eric Mc on Wednesday 11th July 13:56
I understand that the stock you own counts as profit, but we are investing in tools, equipment and things like composite moulds so we can produce fibreglass and carbon products also we have sent money on advertising - so they still count as profit even though you make have at the end of the year nothing in the bankaccount?
Much of our stock has been bought by the money we each invested into the company so its effectively still in a minus until thats all been paid for etc.
If that all counts then i'd better make more ££'s then rather than spend it..
Much of our stock has been bought by the money we each invested into the company so its effectively still in a minus until thats all been paid for etc.
If that all counts then i'd better make more ££'s then rather than spend it..
Edited by Batfink on Wednesday 11th July 14:14
Edited by Batfink on Wednesday 11th July 14:15
The purchase of tools and equipment is NOT counted as a cost when working out your taxable profit.
Say your sales for the year came to £25,000 and you ordinary purchases and business expenses (not including the purchase of equipment) came to £10,000. That would leave you with a profit for the year of £15,000.
If, in addition to the £10,000 expenses mentioned above, you spent a further £5,000 on new equipment and tools, you could not offset the full £5,000 paid for these items against the profit of £15,000.
Instead, you claim Capital Allowances on the equipment costs.
These allowances are a percentage of the cost of the assets. In the year of purchase, the allowance can be as high as 50% of the cost of the asset but the normal annual Capital Allowance claim rate is 25%.
So, the maximum claim you could make for the £5,000 assets purchased would be £2,500 (£5,000 x 50%).
Gordon Brown announced a wholesale restructuring of tax claims attributable to Capital Expenditure in his last budget. These changes (which have not yet been finalised) will come into effect on 5 April 2008.
Regarding purchase of stock, that is a normal deduction against sales - however, if stock has been purchased and remains unsold, then the unsold stock CANNOT be offset against the sales generated so far. Unsold stock is carried forward for offset against the sales generated when it is eventually sold.
Say your sales for the year came to £25,000 and you ordinary purchases and business expenses (not including the purchase of equipment) came to £10,000. That would leave you with a profit for the year of £15,000.
If, in addition to the £10,000 expenses mentioned above, you spent a further £5,000 on new equipment and tools, you could not offset the full £5,000 paid for these items against the profit of £15,000.
Instead, you claim Capital Allowances on the equipment costs.
These allowances are a percentage of the cost of the assets. In the year of purchase, the allowance can be as high as 50% of the cost of the asset but the normal annual Capital Allowance claim rate is 25%.
So, the maximum claim you could make for the £5,000 assets purchased would be £2,500 (£5,000 x 50%).
Gordon Brown announced a wholesale restructuring of tax claims attributable to Capital Expenditure in his last budget. These changes (which have not yet been finalised) will come into effect on 5 April 2008.
Regarding purchase of stock, that is a normal deduction against sales - however, if stock has been purchased and remains unsold, then the unsold stock CANNOT be offset against the sales generated so far. Unsold stock is carried forward for offset against the sales generated when it is eventually sold.
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