How Does a Business Partnership Pay Taxes?
Do you do business in partnership with one or more other people? This does involve some extra admin. But it isn’t as complicated as you might think.
Here’s our handy guide to how business partnerships pay taxes to the HMRC.
Paying business partnership taxes
If so, you need to register your business partnership with HMRC and file taxes separately. Even if you and your partners are already registered for self-assessment.
How do I register a business partnership with the HMRC?
Registering your business partnership to pay taxes with HMRC involves three steps:
- Every partner must register for self-assessment as an individual. You can do this on HMRC’s website in under five minutes.
- Choose a nominated partner. The nominated partner takes care of tax returns and business records. If you and your partners don’t choose a nominated partner (or can’t agree on one), HMRC will pick one of you at random.
- Register the partnership for self-assessment. Again, you can do this online in under five minutes.
How are business partnership taxes calculated?
Like sole traders, business partnerships only pay taxes on their profits. In other words, you only pay tax on income after deducting expenses.
As a rule of thumb, you can deduct any expenses as long as they’re business-related, including:
- Office rent, utilities and broadband
- Professional fees (such as accounting and legal fees)
- Advertising and marketing
- Banking charges
- Cost of sales, for instance, the cost of raw materials or subcontracted work
- The cost of business-related equipment, including machinery and uniforms
You must input any expenses in the business partnership’s profit and loss account. This document is the starting point for calculating the partnership’s taxable profits.
What about partners’ business-related expenses?
Partners cannot deduct business-related expenses on their personal tax return.
So, if a partner pays for any business-related expenses out of their own pocket — business mileage, home office expenses or mobile phone costs, for instance — they must include them in the partnership’s profit and loss account.
How do business partnerships file taxes in the UK?
Here’s how to file your business partnership taxes in the UK in five easy steps:
- Calculate the partnership’s profits by deducting income from allowable expenses.
- Make any necessary adjustments. For instance, you’ll need to add the full amount of any work-in-progress, even if you haven’t invoiced the client yet.
- Divide the partnership profits between the partners.
- File a partnership tax return. This is the nominated partner’s job.
- Each partner files a self-assessment tax return and pays tax and National Insurance.
Each partner’s share of profits depends on what you’ve agreed when you started the partnership.
You don’t have to have a written document to start a partnership. That said, it’s a good idea to put at least your profit-sharing agreement in writing. That way, you’ll have a written record of what you’ve agreed in case of a dispute.
Let’s say you’re in business with one other partner.
Your partnership made £100,000 in profits in 2018/19 after deducting expenses. And you’ve agreed to split any profits down the middle.
As a result, each of you gets £50,000.
When should I file a partnership tax return?
You need to file a partnership tax return with HMRC at the end of each financial year. In the UK, the financial year starts on 5 April and ends on the 4 April.
The deadlines are:
- 31 October for a paper return
- 31 January for an online return
The partnership return should include:
- The profit and loss account
- Any adjustments
- Each partner’s share of the profits
How much tax is due on partnership profits?
Business partnerships don’t pay tax. Instead, each partner pays tax on their share of partnership profits.
You pay tax on partnership profits at current HMRC rates.