Understanding the Tax System for Partnerships
The tax you owe on your share of your business's profits is calculated in the same way as if you were self-employed. This means that each partner is taxed on their share of the profits as if they were running their own business, with profits equal to their share of the firm's profits. This can be a surprise if you haven't saved enough money to pay the tax bill, as it will be deducted from your earnings.
What Profits Are Taxed in the UK?
The taxable profits of a partnership are calculated by starting with the profit and loss account. This is the same as for a sole trader. The firm can claim deductions from business income for expenses incurred for trade, with minor exceptions. Partners need to make sure that all expenses they want to claim are included in the profit and loss account.
This is because there is no option to deduct these from the share of profits after allocation between the partners. So, if any partners run an office from home or have a personal mobile telephone or other costs, these need to be included in the firm's profits to get tax relief.
Capital allowances allow businesses to deduct the cost of certain assets over time. When you buy equipment or vehicles for your business, you can claim a deduction for a portion of the cost each year you own and use the asset. This helps businesses spread the cost of assets over time rather than deducting the entire cost in the year the asset is purchased.
The tax a business must pay on its profits is determined by its profit-sharing agreement. Wages paid to partners of the business are not considered deductible. Still, if a partner's spouse works for the business, their wages may be deducted if they are considered a reasonable payment for their work.
How Is Profit Allocated to Tax Years?
The tax system is designed so businesses will only be taxed on their profits once over the lifetime of the business. This is intended to be fair, but there are some complications that businesses will need to be aware of.
The tax for a particular tax year is based on the profits of the 12 months leading up to the accounting date in that tax year. This means that if your accounts end earlier in the tax year, you have more time for the tax to be calculated, which is why many self-employed people, including partners, choose to have their accounts end on 30 April.
How Is the Tax Collected?
If you want Her Majesty's Revenue and Customs (HMRC) to collect any taxes you owe through your tax code, you must submit the return online by 30 December 2022. This only applies if you receive income that is subject to PAYE.
If you have a debt of less than £3,000, you may be able to request that the amount be taken directly from your pay. This amount may be higher if you earn a lot of money through PAYE, up to a maximum of £17,000 in some cases.
If you have any outstanding tax from the 2021/22 tax year, you must pay this by midnight on 31 January 2023.
The partnership tax system can be complicated, but it is important to understand the basics to minimise your tax liability. There are different types of partnerships, each with its own rules. The most important thing to remember is that partners are responsible for their share of the partnership's tax liability.
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