Sole Trader UK: Setup, Tax, NI and Day-to-Day EssentialsPartnership Tax and Structure Guide UK — How Partnerships Are Taxed
How UK business partnerships are taxed, the different partnership types, profit sharing, tax returns, and National Insurance for partners.
If you’re going into business with someone else, the legal structure you choose affects your tax bill, liability, and admin. This guide explains how partnerships work and compares them to alternatives.
Types of Partnership
| Type | Legal liability | Tax treatment | Formal registration |
|---|
| Ordinary partnership | Unlimited — each partner is personally liable for all debts | Tax transparent — partners taxed individually | Register with HMRC, but not Companies House |
| Limited partnership (LP) | At least one general partner has unlimited liability; limited partners have limited liability | Tax transparent | Register with Companies House |
| Limited Liability Partnership (LLP) | Limited liability for all members | Tax transparent (mostly) | Register with Companies House |
How Partnership Tax Works
| Step | What happens |
|---|
| 1 | Partnership earns income and incurs expenses |
| 2 | Partnership calculates total taxable profit |
| 3 | Profit is allocated to each partner per the partnership agreement |
| 4 | Partnership submits SA800 tax return to HMRC |
| 5 | Each partner includes their share on their own SA100 Self Assessment return |
| 6 | Each partner pays income tax and NI on their share |
The partnership itself pays no tax — it’s “tax transparent”.
Profit Sharing
| Arrangement | How it works |
|---|
| Equal shares | Profits split equally (default if no agreement) |
| Fixed percentages | E.g. 60/40, 70/30 |
| Salary + profit share | Partners receive a “salary” (priority profit share) first, then split remainder |
| Performance-based | Shares vary based on individual performance |
| Seniority-based | Senior partners receive a larger share |
Important: A partner’s “salary” from a partnership is NOT wages — it’s a way of allocating profit. There’s no PAYE.
Tax on Partnership Profits
Income Tax
| Tax band (2025/26) | Rate | On profits of |
|---|
| Personal allowance | 0% | Up to £12,570 |
| Basic rate | 20% | £12,571 – £50,270 |
| Higher rate | 40% | £50,271 – £125,140 |
| Additional rate | 45% | Over £125,140 |
National Insurance
| Class | Rate | On profits of |
|---|
| Class 2 | £3.45/week | If profits above £12,570 |
| Class 4 | 6% | £12,570 – £50,270 |
| Class 4 (upper) | 2% | Above £50,270 |
Example: Equal Partnership, £100,000 Total Profit
| Detail | Partner A (50%) | Partner B (50%) |
|---|
| Profit share | £50,000 | £50,000 |
| Personal allowance | -£12,570 | -£12,570 |
| Basic rate tax (£37,430 @ 20%) | £7,486 | £7,486 |
| Class 2 NI (52 weeks) | £179 | £179 |
| Class 4 NI (£37,700 @ 6%) | £2,262 | £2,262 |
| Total tax + NI | £9,927 | £9,927 |
| Take home | £40,073 | £40,073 |
Partnership vs LLP vs Limited Company
| Feature | Partnership | LLP | Limited company |
|---|
| Liability | Unlimited | Limited | Limited |
| Tax on profits | Income tax + NI (each partner) | Income tax + NI (each member) | Corporation Tax (25%) |
| Extracting money | Profit share (automatic) | Profit share | Salary + dividends |
| Admin burden | Low | Medium | Higher (accounts, CT return, Companies House) |
| Privacy | Higher (no public accounts) | Accounts filed publicly | Accounts filed publicly |
| Cost to set up | Low (just partnership agreement + HMRC registration) | £40 Companies House + agreement | £12 Companies House + articles |
| National Insurance | Class 2 + 4 | Class 2 + 4 (usually) | Class 1 on salary only |
| Tax efficiency at £50k+ profit | Lower | Lower | Often higher |
| Pension contributions | Self-employed options | Self-employed options | Employer contributions (tax deductible) |
When Is a Limited Company More Tax-Efficient?
At roughly £50,000–£60,000+ profit, a limited company can save tax because:
| Factor | Partnership | Company |
|---|
| Tax on first £50,270 profit | 20% income tax + 6% NI = 26% | 25% Corporation Tax |
| Tax on profit above £50,270 | 40% income tax + 2% NI = 42% | 25% Corporation Tax + dividend tax on extraction |
| NI on profit extraction | 6%–9% at all levels | Only on salary (can be minimised) |
In a company, you can pay yourself a small salary (£12,570) and take the rest as dividends — which have lower NI costs.
Partnership Tax Returns
What the Partnership Submits
| Form | What it covers |
|---|
| SA800 | Partnership tax return — total income, expenses, profit allocation |
| Deadline (paper) | 31 October following the tax year end |
| Deadline (online) | 31 January following the tax year end |
| Penalty for late filing | £100 per partner |
What Each Partner Submits
| Form | What it covers |
|---|
| SA100 | Personal Self Assessment — includes partnership income |
| SA104 | Partnership supplementary pages |
| Deadline | 31 January (online) |
| Payment on account | Two payments on account (31 January + 31 July) |
Partnership Agreements
A written partnership agreement should cover:
| Topic | Why it matters |
|---|
| Profit sharing ratios | How profits and losses are split |
| Capital contributions | How much each partner invests |
| Decision making | How decisions are made (majority, unanimous, etc.) |
| New partners | How to admit new partners |
| Leaving/retirement | How a partner exits and what they receive |
| Dispute resolution | Mediation, arbitration, or legal action |
| Death of a partner | Insurance, succession, buy-out |
| Non-compete clauses | Restrictions after leaving |
| Accounting year end | When the partnership’s tax year ends |
Without a written agreement, the Partnership Act 1890 defaults apply — including equal profit sharing regardless of work contributed.
Expenses You Can Claim
| Expense | Deductible? |
|---|
| Office/premises costs | Yes |
| Employee wages | Yes |
| Business travel | Yes |
| Professional indemnity insurance | Yes |
| Accountancy fees | Yes |
| Marketing and advertising | Yes |
| Equipment and tools | Yes (capital allowances) |
| Working from home | Yes (simplified or actual costs) |
| Partners’ own NI or income tax | No |
| Partners’ personal drawings | No — drawings are profit extraction, not an expense |
Summary
| Feature | Detail |
|---|
| How taxed | Each partner pays income tax + NI on their profit share |
| Partnership pays tax | No — tax transparent |
| Partnership tax return | SA800 submitted to HMRC |
| Each partner’s return | SA100 + SA104 |
| Liability | Unlimited (ordinary), limited (LLP/LP) |
| More tax-efficient option | Limited company at higher profits (£50k+) |
| Essential document | Written partnership agreement |
| Key deadline | 31 January for tax return and payment |
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