The Partnership Act 1890 says that a partnership exists where two or more persons come together with a view to profit. Note that it doesn’t say you have to actually make a profit, a point often ignored by the taxman. So what is a partnership?
Assuming that you have either a good idea for making money or an existing business which is profitable it is a good idea to look within the family first. Does your spouse or life partner use up all of their personal allowances of £11,850? If not then bringing them into your business would reduce the tax burden on the household. Class 4 National Insurance Contributions would have to be paid but only on the share of the profits which each partner has over £8,164. If you are about to go into business you should create the partnership at the outset. There is still a benefit to be gained even if your partner is working provided that they are still only taxed at the basic rate of 20% as they could earn up to the 40% threshold and still have the benefit of the £8,164 NIC break to reduce the Class 4 burden.
It is important that all partners, in a simple partnership, have equal access to the firms’ bank accounts being either joint holders or authorized signatories. Each will be liable for the firms’ losses and each shares the firms’ profits.
Limited Liability Partnerships are different and if you think you need one these you must take professional advice. In an LLP one person has to be responsible for the firm but the others’ liability is restricted to whatever they put into the firm, similar to a Limited Company.
A partnership does not have to pay tax on its’ profits, but the partners pay tax on their share of the profits, and, like Sole Traders – the posh term for being self-employed – tax is payable in January and July following the partnerships’ accounting date. Thus if you were to start now, your first period end would be 5th April 2018, and you would pay tax in January 2019. If the individual partners’ tax was less than £1,000 then that would be all that would be paid in January 2019. If the individual’s tax was over £1,000 then the tax plus a half of the tax would be paid in January 2019 and a further half would be paid in July 2019. The two halves would be set against the tax due in January 2020. The tax for the year is calculated first, plus anything on account. Then the money already paid on account is deducted from what is due for January. Thus it is possible to have a refund in January but still pay tax in July. A partnership can choose any accounting date but it would still be taxed on the profits to 5th April next. The next trading year could have a split tax calculation or an overlap calculation.